Tigran Poghosyan (IMF Resident Representative for Mongolia)

Asia’s Outlook Dims Amid Trade Tensions

US tariffs have reached their highest levels in a century, with many of the steepest aimed at Asia. The region, which contributed nearly 60% of global growth in 2024, is now seeing its trade-led development model tested. Long reliant on liberalized trade and deep integration into global value chains, Asia faces mounting challenges as US-China tensions escalate and global trade policy becomes increasingly uncertain. While some tariffs have been paused, the overall climate of protectionism and weaker global demand is weighing heavily on regional prospects.

Against this backdrop, the economic outlook for Asia and the Pacific has dimmed significantly. Regional growth is forecast to slow to 3.9% in 2025, down from 4.6% in 2024—the sharpest downgrade since the pandemic. Advanced Asian economies are projected to grow by just 1.2%, while growth in emerging and developing Asia is expected to reach 4.5%, both reflecting downward revisions. China’s growth is set to remain around 4% despite fiscal stimulus, and ASEAN economies are particularly exposed, with growth downgraded to 4.1% amid external shocks and soft domestic demand. India, less reliant on trade, is expected to slow moderately but remain a relative outperformer.

Tariffs and rising trade barriers threaten to dent the region’s post-pandemic momentum, especially as many Asian economies depend on exports amid subdued domestic demand. High debt burdens and rising borrowing costs have also curbed consumer spending in several countries. While demand for high-tech exports—especially those linked to AI—has supported trade with the US and other advanced economies, this has also increased Asia’s vulnerability to shifts in US demand and the risks of intensifying protectionism.

Mongolia’s Economy Will Feel the Impact

While Mongolia is not directly involved in the ongoing tariff wars, it remains highly vulnerable to the ripple effects of escalating global trade tensions—particularly those between the United States and China. As China absorbs over 90 percent of Mongolia’s exports, mostly in minerals like coal and copper, any slowdown in Chinese demand due to tariffs or weakened industrial activity poses a direct threat to Mongolia’s economic growth and budget. Lower commodity prices, driven by heightened global uncertainty, could further erode national income, reduce government revenue, and widen external imbalances.

The growing uncertainty in global markets is likely to dampen investor confidence, especially in small, resource-dependent economies such as Mongolia. Weaker foreign investment would hinder progress on critical infrastructure, mining, and diversification projects—many of which are central to the coalition government’s development agenda. A decline in both export earnings and capital inflows would strain Mongolia’s external accounts and weigh heavily on its financial resilience.

These pressures are already felt through the exchange rate. Reduced foreign currency inflows have weakened the tugrik, raising the cost of imports such as fuel, machinery, and consumer goods. Mongolia could face rising inflation, eroding household purchasing power and forcing the central bank to tighten monetary policy further. In turn, higher interest rates could dampen domestic demand, compounding the economic slowdown.

Balancing Act for Policies to Counter the Vicious Cycle

The policy priority is to restore both external and internal balances and avoid a rapid erosion of policy buffers to prepare for future shocks.

Greater fiscal prudence and adherence to fiscal rules are needed. To avoid buffers from eroding and external imbalances from widening, the government should restrain demand for imports by containing current spending and strengthening collections of non-mining tax revenues. The planned cuts to non-mining taxation need to be reconsidered. The government needs to proceed cautiously on mega projects given existing weaknesses in public investment management and constraints in absorption capacity.

With rising inflation and credit growth, the BOM needs to maintain tight domestic financial conditions. A further increase in the policy rate is warranted to contain inflation and manage inflation expectations, while reserve requirements should aim to manage liquidity. The debt service-to-income limits of the non-bank financial sector should be harmonized with those of the banking sector to contain excessive growth in consumer credit and reduce regulatory arbitrage.

Amendments to the central bank law, including recapitalization plans, are critical to boost the BOM's operational independence, thus its effectiveness and credibility.

Finally, greater exchange rate flexibility would strengthen resilience against external shocks.