Growth continued to decline in 2016 because of slowing exports of coal and metals to China and also slower inflows of FDIs, against a background of weak commodity prices and worsening investor confidence. In 2017, growth is expected to pick up slightly. The growth rate, will, however, remain well below the average observed between 2010 and 2014 (11.3 %). Mongolia's economy is expected to continue to be impacted by slack commodity prices, first and foremost the price of coal, and the decline in Chinese demand - the Middle Kingdom being the recipient of 90% of the country's exports. Nonetheless, the start of work on the second phase of the Oyu Tolgoi mine (one of the world's largest gold and copper reserves) should benefit the mining and construction sectors. However, foreign investment will still be limited by the challenging outlook for the mining sector, the Chinese downturn and the instability of the regulatory framework. Meanwhile, private demand is likely to be hampered by the fiscal consolidation measures and monetary tightening (key rates raised by 450 basis points in August 2016 to 15%) introduced by the government in the second half of 2016. Finally, subsistence agriculture based on cattle rearing remains vulnerable to climatic shocks and pandemics. In this context, in which the currency could depreciate again and oil prices increase, inflation will rise in 2017.

In 2016, the authorities revised the budget deficit sharply downwards. This adjustment is explained, in particular, by the inclusion of expenditure historically accounted for off-balance sheet. At the same time, the government has announced fiscal consolidation measures which should help the country embark on a process of deficit reduction from 2017. The country has also requested IMF support and could benefit from a loan of USD 1.5bn during 2017 in order to meet short-term repayment deadlines. However, there is very little room for maneuver on the budget, as the country is vulnerable to the volatility of budgetary resources from mining - structural reforms are needed and parliament is struggling to pass unpopular measures. As a result, the public debt will remain very high. Meanwhile, external debt has risen sharply and accounted for almost 210% of GDP in June 2016. External debt is mostly held by the private sector, with over half related to inter-company lending associated with FDIs. Furthermore, after narrowing in 2016 because of lower imports, the current account deficit is expected to widen again in 2017. Imports of capital goods are likely to rise due to work starting on phase 2 of the Oyu Tolgoi mine. Meanwhile, despite improved relations between Rio Tinto, the main Oyu Tolgoi shareholder, and the government, FDIs will remain below potential. This is because the outlook for the mining sector is still uncertain and investors are worried about the country's financial stability. Accordingly, the tugrik will again be under downward pressure having depreciated by more than 20% since June 2016. Against this backdrop, the level of foreign exchange reserves could continue to fall, having fallen by over 53% between January 2014 and August 2016 and still representing less than 3 months of imports.

During the parliamentary elections held on 29 June 2016, the opposition (the Mongolian People's Party) won an overwhelming majority (65 out of 76 seats) and Erdenebat Jargaltulga was appointed prime minister in July. A result of popular discontent in response to the worsening economic situation, this huge majority should provide the government with relative stability, whereas previous governmental teams relied on fragile coalitions. The choice of prime minister, the former finance minister who favors operations in the country's mining sector, is testimony to the desire of the MPs to encourage foreign investment and implement more cautious economic policies. However, governance shortcomings still form the country's Achilles heel and the risk of social tensions needs to be watched.