Recent Chinese economic weakness has been hurting emerging markets around the world, and no economy has felt the slowdown more than Mongolia. The troubles in Mongolia are a case study in what has already been happening to China-dependent emerging markets around the world, and a sign of things to come. Bloomberg reports:
Mongolia, sandwiched between China and Russia, is an early illustration of fallout from slower growth in the world’s second-biggest economy. “When China sneezes, we get a cold. That is how the situation is. It really affects us in a major way,” Dale Choi, founder and director of the research firm Independent Mongolian Metal & Mining Research, said in a phone interview.
That’s because about 88 percent of Mongolia’s exports — mostly commodities including coal — wound up in China in 2014 and falling revenue from these products is pushing Mongolia deeper into economic crisis. Earlier this month the country’s Finance Minister Bolor Bayarbaatar unveiled emergency austerity measures so the government can pay its bills.
Mongolia is now in an “emergency” situation, planning an austerity package that will lead to job cuts in the bureaucracy and selling shares of state-owned companies. Probably more than any other country, Mongolia combines extreme exposure to Chinese markets with a near-total reliance on commodities exports. Since the fall of the Soviet Union, Mongolia has transitioned towards a market-based economy and has deepened its ties to resource-hungry China, while moving away from resource-rich Russia. For two decades, that strategy worked. But now, Mongolia’s failure to diversify is making for a hard landing.
The Chinese economy is beginning to transition from heavy industry to services. That is good for China, but it means that commodities-driven economies like Mongolia’s will be left in the dust.