2019 | October | 023
The Parliament is discussing next year’s budget and monetary policy. Economists are appraising the budget draft proposed by the Ministry of Finance as too over-optimistic compared to the previous two years’. Politicians, however, are defending it as normal from the perspective of the election year. 12.9 trillion MNT of total revenues of the integrated budget is indeed an unprecedented high number. As explained by the Ministry of Finance, business activation will restart after a six-percent economic growth and tax and customs reforms.
Meanwhile, the mining sector is expected to carry the burden of this exorbitant budget revenues in tradition. Certain indicators and statistics will show that the burden on mining has been ever-increasing compared to previous years. The Ministry of Finance has projected in the budget draft that the mining sector will bring in three trillion and 195 billion MNT to the state budget next year. This is 6.5 percent higher than expected performance and nearly 4.3 percent higher than four years before.
While mining revenues reached merely 747 billion MNT in 2016 budget performance, the following year saw a two-fold increase. This year’s performance is projected to increase twice as well – the mining sector revenue. We have never seen revenues that exceeded three trillion MNT from the mining sector before. This year’s better-than-expected performance of the coal sector has been the main crutch in meeting the budget targets. However, 1.9 trillion MNT in mining revenues in the first three quarters provide only 64 percent of the target.
One-third of income taxes paid by all companies operating in Mongolia next year will be paid by coal companies alone
Breaking down the revenues from mining according to each mineral, copper, and coal provides 2.65 trillion MNT or 83 percent of the total revenues. It’s interesting to note that copper revenues have gone down by 140 billion MNT as compared to this year’s expected performance. The decrease in Oyu Tolgoi and Erdenet copper grades will affect copper concentrate exports to shrink and the expected fall in global copper market price has been considered in this decreased projection of copper revenues. On the other hand, gold revenues were estimated to double and gold royalties to triple to 126 billion MNT.
If we see the breakdown of next year’s budget draft, the Ministry of Finance has positively estimated the outcomes from the three mining sector risks – coal exports, Oyu Tolgoi mine development or foreign investments, and minerals licenses.
Regarding coal exports, again, the Ministry of Finance estimated 42 million tons of export and 1.5 trillion MNT in tax revenues. Despite this estimation, the first three-quarter exports were at 66 percent only. Considering that China doesn’t cut its coal imports until the end of the year, Mongolia’s coal export is likely to reach 38 million tons. Whether through sheer luck, coal market price did not fall as expected a year ago, allowing coal revenues to come in without interruption. By the first nine months, the weighted average coal export price has been 84.8 USD which is 10 USD higher than the budgeted price. This would mean although volumes will not reach targets, the price margin will fill the planned revenues. In the next year, however, the weighted average price was estimated at 74.7 USD and coal revenues were budgeted at 494 billion MNT or 183 billion MNT higher than this year’s performance.
The next indicator showing coal dependency is Corporate Income Tax. The chart illustrates the revenues to be allocated in the budget from CIT, one of the critical sources of budget revenues. Next year, income taxes paid by mining companies will exceed the taxes paid by non-mining sector companies for the first time. 1 trillion and 850 billion MNT was estimated next year for CIT revenues. 1 trillion or 54 percent of this will be paid as mining companies taxes, of which 670 billion MNT will come from non-mining companies. In other words, one-third of income taxes paid by all companies operating in Mongolia next year will be paid by coal companies alone. The Ministry of Finance’s draft budget estimates that coal companies will pay 300 billion MNT more or twice as higher in taxes than this year’s expected performance.
It’s hard to guess why the Ministry of Finance is putting down 42 million tons of coal exports in the budget time and again, despite knowing its impossibility. According to their reasoning, “the port throughput capacity will be increased after the customs reform is completed, justifying the estimation of 42 million tons of coal export and 1.5 trillion MNT in coal revenues to the budget”. Another reasoning could be that 42 million tons of coal export were reflected to enforce the fulfillment of the mandatory budget requirement. Next year’s budget of 2 trillion 74 billion MNT is hitting the criteria “The equilibrated balance deficit of the integrated budget in 2020 shall not be higher than 5.1 percent of the current year’s GDP”. If coal revenues fall, at any rate, these criteria will not be met. Even if considering 38 million tons in coal export and stable price, the budget revenue will still have a gap of over 300 million USD or 800 billion MNT. This would create a budget deficit of 2.9 trillion MNT, exceeding 5.1 percent of the GDP. Therefore, they estimated coal revenues at the maximum level.
The second major risk is foreign direct investment relied on Oyu Tolgoi project development. According to 2018 performance, foreign direct investment to Mongolia was 2.17 billion USD, of which 1.3 billion USD or 60 percent accounted for Oyu Tolgoi’s investment. 1.21 billion USD of this amount was directed at underground mine development. This year, however, Oyu Tolgoi’s investment is estimated at around 1.1 billion USD.
It appears that the Ministry of Finance is estimating foreign direct investment to be stable, relying on Oyu Tolgoi’s underground project investment and IMF’s program financing. In reality, it’s no secret that Oyu Tolgoi’s future is still uncertain and IMF’s program has stalled. It is also true that no policy is in place to pull in and support foreign direct investments other than these two. It’s as if the Ministry of Finance and the Government are oblivious to the “red light” in front of investors targeting Mongolia due to decisions by the Parliament and Cabinet to cancel mining licenses, confiscate private properties to the state, and halt the issuance of explorations licenses, as well as talks of investigating and canceling Oyu Tolgoi project agreements. This is probably why they are estimating the budget on the assumption that foreign direct investment and the economy is growing and will grow in the future, and businesses will be reinvigorated. Economists’ criticism that next year’s budget is overly optimistic owes to this, as well.
The third mention of next year’s budget is the underestimation of revenues from mining license fees. 36 billion MNT planned from license fees is the lowest estimation in the past four years. This is the Ministry of Finance’s preliminary answer to the question of whether the Government enforces the application-based license issuance procedure in 2020.
The saving grace for the economic outlook and the state budget in 2020 is the mining sector, backed by the above statistics. It’s safe to say the market and price for main commodities including coal, copper and gold this year are stable and profitable for our country. However, its continued performance in the next year is questionable and the stakes are high for the budget and the economic state should this performance change.
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