Economic Analysis - Fiscal Deficit To Narrow Further Following Success In 2017 - MAY 2018

BMI View: We expect the Mongolian government to press on with its efforts to consolidate its fiscal deficit over the coming quarters, following a significant reduction in its shortfall to 6.2% of GDP in 2017 from 15.1% in 2016. This will be achieved by reining in spending as well as improving revenues due to stronger economic growth and better tax administration. The central bank will also likely seek to build up its external liquidity over the coming quarters.

The Mongolian government saw a significant improvement in its fiscal consolidation efforts in 2017, with the fiscal deficit as a share of GDP narrowing to 6.2% (slightly worse than our estimate of 5.5%) from a shortfall of 15.1% of GDP in 2016, and in our view, the improving public finances are positive for Mongolia's macroeconomic fundamentals. We are therefore forecasting the fiscal deficit to narrow to 4.3% of GDP in 2018. This marked a remarkable turnaround from the crisis situation faced by the country in 2016 due to substantial overspending partly due to parliamentary elections and poor revenue streams from slowing economic growth and weak commodity revenues.

Indeed, investors have been pushing Mongolian bond yields lower over the course of 2017, with yields on the international bond that is maturing in 2022 falling to 5.5% (as of March) from 8.1% at the start of 2017. The improvements also saw Moody's Investor Service raising the sovereign's long-term issue ratings and senior unsecured ratings from Caa1 to B3 in January, while Fitch Ratings revised the outlook to positive on Mongolia's Long-Term Foreign-and Local-Currency IDRs in November 2017.

2017 Marked First Reduction In Many Years
Mongolia - Fiscal Deficit, % Of GDP
f=BMI forecast. Source: BMI, BoM

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