On 29 June, the opposition centre-left Mongolian People’s Party (MPP) largely won legislative and local elections against the ruling Democratic Party, which gives it a comfortable majority of 65 out of 76 seats in Parliament. The wide opposition success was expected given the broad population disappointment about the political class, bad governance and corruption. The previous government was also blamed for long delays in approving new projects in the resources sector, unemployment, poverty and the gloomy economic climate after years of fast growth. Despite disenchantment about politics, turnout was elevated at 72% and elections proceeded peacefully. The MPP’s solid majority should ensure political stability during its four-year term.

Impact on country risk

The economic task awaiting the new government is very challenging. In Asia, Mongolia remains among the most affected by the commodity slump. Its commodity overreliance (principally on copper, coal and gold) and huge vulnerability to a slower growing China have brought down GDP growth from double-digit rates in 2011-2013 to a mere 2.3% in 2015 and an expected flat rate (0.4%) this year. The recent small rebound in commodity prices is giving Mongolia some small temporary relief and has allowed reversing the decline in foreign exchange reserves. Still, the short-term economic outlook is negative. Exports are indeed expected to continue to contract, thereby maintaining pressures on the balance of payments. Moreover, public debt has ballooned in past years to become Asia’s second-largest (at 86% of GDP in 2015) as government capital spending and borrowing have soared and mining revenues tumbled, hence the budget deficit deepened towards 9% of GDP. Heavy external public debt repayments in the coming years are top downside risks for the country given potential pressures on foreign exchange reserves and big external financing needs, which contribute to keep medium long term political risk high. In this context, political stability prospects and the improved government stance towards foreign investors are welcomed as the latter eventually allowed the approval of the giant Oyu Tolgoi mine’s second phase of development which will gradually support the economy and budget through higher FDI and export revenues.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com