Mongolia: the next EM superstar?

Forget China. The fastest growing country over the next 20 years will be its diminutive central Asian neighbour Mongolia, according to a report released by Citigroup this week.

The report, written by economists Willem Buiter and Ebrahim Bahbari, predicts that the Mongolian economy will expand 8.7 per cent annually (in purchasing power parity terms) between now and 2030. A low base, favourable demographics and a high savings and investment rate are expected to be the biggest contributors to its explosive growth.

The country’s growth potential has already been recognised by some investors: strong demand for Mongolian equities made them the best performing in the world in 2010.

The report calculates countries’ growth potential using a novel “Global Growth Generators” (3G) index. This is a weighted average of six growth drivers selected by Citigroup: domestic savings/investment, demographics, health, institutions and policy, and trade openness.

The 3G index yields some surprising results. Among the highest ranked countries are Bangladesh, Egypt, Iraq, Nigeria, the Philippines and Sri Lanka.

None of these countries, however, is expected to grow as fast as Mongolia over the next 20 years. The next fastest, India, is predicted to expand 7.7 per cent annually – a full percentage point lower than Mongolia.

What explains Mongolia’s world-beating growth prospects? Three factors are especially important. The first is a low base. Mongolia’s 2010 level of real per capita income (in PPP terms) is $3,674, putting it in 51st place globally, below countries such as the Republic of Congo, Fiji and Honduras.

Favourable demographics will also give it a boost. Mongolia’s population is “small, young and growing” in Citigroup’s words, and expected to increase from 2.7m in 2010 to 3.5m over the next 40 years. Its working age population will grow by 18.7 per cent over the same period.

Finally, the Mongolian economy will benefit from a domestic investment boom. From 2006 to 2009, its investment rate was 38.5 per cent and its saving rate 39.1 per cent – among the highest in the world. As long as these rates stay relatively stable, Mongolia’s labour productivity should increase rapidly – just like that of its frugal neighbour China over the past 30 years.

While Mongolia performs weakly on the policy and institutions component of the 3G index, it has so far succeeded in avoiding the “natural resource curse” that has blighted so many low-income commodity exporters. Copper, coal, tin, tungsten and gold account for a large proportion of the Mongolia’s industrial production.

As Citigroup says:

Mongolia’s economy is overwhelmingly based on resource extraction. It is therefore a prime candidate for the natural resource curse. Unlike most of the other central Asian countries, however, Mongolia has thus far avoided the lure of personalised autocracy or strong-man rule, and the bureaucracy, although weak, is some distance from the klepocratic end of the ‘kleptocratic-technocratic’ continuum.

Investors can be reasonably confident, then, that their money is safe in Mongolia. And if strong growth translates into higher investment returns – as it did last year – Mongolia may be about to become a lot more popular.

Source:Financial Times