The economic costs though were significant. The fall in external and domestic demand led to a 9.7 per cent contraction in GDP in the first half of the year. Adverse external shocks are reflected in the exchange rate and gross reserves. Compared to the beginning of the year, the domestic currency, the Togrog, depreciated against the US dollar by 4 per cent and gross international reserves have fallen by US$700 million, although this is primarily because a domestic bank paid a US$500 million US dollar bond repayment.

Economic policy has loosened significantly to maintain stability and protect the most vulnerable. On the fiscal policy front, the Ministry of Finance introduced fiscal stimulus equivalent to 7.2 per cent of GDP, including reducing the social security contribution, increases in the universal transfer program (known as child money), and health spending. According to the budget passed by the parliament, the overall fiscal balance is projected to reach –12.5 per cent of GDP this year and –5.1 per cent in 2021.

The Bank of Mongolia (BOM) has cut policy rates by 500 basis points, reduced the reserve requirement by 4.5 percentage points, suspended the debt-service-to-income ceiling on consumer loans, and provided targeted longer-term financing to the banking sector as permitted under COVID-19 laws. These direct policy measures will help economic recovery.

For the financial sector, the BOM has taken temporary forbearance measures, softening asset classification requirements, to extend maturities on consumer and mortgage loans and to restructure business loans in the banking sector. These measures have reduced pressure on borrowers and banks.

Since the mining sector started to bounce back in August there have been promising signs of recovery in the economy. Exports have soared in recent months with the high level of coal deliveries to China. Gold production has increased dramatically with the opening of a new mine and high global prices.

The domestic COVID-19 outbreak that began in November, however, has delayed further economic recovery and increased uncertainty, but the baseline economic outlook remains favourable. The BOM projects a contraction of 5.4 per cent for 2020 and an expansion of 6 per cent for 2021. Inflation remains subdued and below the target level for 2020 and will likely stabilise around the target level of 6 per cent in 2021.

The recovery reflects the rising demand for coal and copper from China, the loosening of monetary and fiscal policies and the positive spill-over effects of the mining sector on the transportation and trade sectors. But there are still significant downside risks in the near-term due to the credit crunch in the banking sector, the ongoing domestic quarantine measures and uncertainty in the external environment, namely in commodity demand and prices.

Though Mongolia has successfully resolved two longstanding risks — rolling over its near-term sovereign debt obligations and delisting from the Financial Action Task Force (FATF) grey list — challenges remain for the economy.

First, despite high government debt of about 70 per cent of GDP — over 90 per cent of which is denominated in foreign exchange — the government has implemented a generous stimulus package. But the package is poorly targeted with a small estimated multiplier, so there is an ongoing challenge of how to improve policy effectiveness with limited fiscal space.

Second, the economy’s high total external debt (220 per cent of GDP), persistent current account deficits (about 15 per cent of GDP each year) and limited gross reserves (equivalent to 8 months of imported goods) make it vulnerable to changes in the external environment. Authorities need to increase the country’s sovereign credit rating and maintain global investors’ confidence to successfully roll over maturing Eurobonds for 2022–2026.

Third, the ongoing credit crunch and a high level of non-performing loans may further weaken financial intermediation and the banking sector’s health. A financially weak, under-capitalised banking sector may adversely affect economic recovery and stabilisation.

Fourth, the government needs to improve economic resilience by enforcing policy discipline, increasing gross reserves and fiscal room, and maintaining cooperation with donors, global investors, and international financial institutions. Fiscal discipline will be an important factor in lifting the economy out of recession.

Overall, despite the challenges of 2020, Mongolia’s economic prospects in the medium term look relatively bright given its untapped natural wealth and a large and fast-growing neighbour able to absorb its exports.

Gan-Ochir Doojav is Chief Economist and Member of the Board of Directors of the Bank of Mongolia.

This article is part of an EAF special feature series on 2020 in review and the year ahead.