“Mongolia's economy continued to perform well in 2005. GDP growth was 6.2%, higher than the 5.3% median among Fitch-rated Asian economies. Favorable weather conditions benefited Mongolia's livestock industry and agricultural production, which account for 20% of GDP, while the 23% surge in merchandise exports also provided upside support to the economy. Fitch forecasts Mongolia's GDP to register growth rates of 5% to 6% in 2006 and 2007,” stated Fitch Ratings in its report released on September 1.

Fitch said that Mongolia's parliamentary politics have posed setbacks to earlier market-friendly efforts to spur foreign direct investment and trade liberalization.

“It is difficult to gauge the extent of fallout from political uncertainty and sudden policy amendments that may have shaken foreign investor confidence and delayed official donor funding,' said Ai Ling Ngiam, associate director in the Asian Sovereigns team.

“The newly-installed parliament has succumbed to popular pressure to more 'equitably' distribute recent supernormal profits reaped by the key minerals sector. Mining legislation has also been overhauled and the sudden imposition of an onerous windfall profits tax has dealt a severe blow to foreign companies operating in the sector. An impending industry shake-up could also lead to greater public sector involvement, and if handled poorly, the re-emergence of illegal mining activities.”

On the past fraudulent activities of the savings and credit cooperatives, Fitch said it indicates signs of stress in the financial system. “Rapid credit growth in the banking sector, including foreign currency-denominated lending, that could represent a challenge for risk management and threaten future asset quality.”