Singapore, September 18, 2012 -- Moody's Investors Service says that Mongolia's near-term
fiscal outlook is clouded by spending pressures which contribute to macroeconomic
volatility, although its long-term economic prospects are
bright.
Mongolia's B1 rating and stable outlook reflect Moody's assessment
of four factors: its "low" economic and institutional
strengths, "moderate" government financial strength,
and "high" susceptibility to risks from financial, economic,
and political events.
According to a new report titled, "Credit Analysis:
Mongolia", the rating is constrained by the country's
susceptibility to destabilizing boom-bust cycles stemming from:
(1) an undiversified economy based on mining and agriculture and which
is subject to the volatility in mineral prices and the occasional extremely
severe winters; and (2) pro-cyclical fiscal policies.
Mongolia's balance of payments remains vulnerable to swings in commodity
prices. Although the adoption of a flexible exchange-rate
policy will help contain macroeconomic imbalances from emerging again,
a loose fiscal policy in 2011 has added inflationary pressures.
While real GDP grew 17.3% in 2011, surpassing the
highs of 10.6% in 2004 and 10.2% in 2007 during
the country's previous boom periods, economic momentum peaked
in the first quarter of 2012. Growth will likely moderate further
this year because of the downturn in key commodity prices and a tighter
monetary policy.
On the other hand, the development of the massive copper deposits
in Oyu Tolgoi and the equally large coking coal deposits in Tavan Tolgoi
and elsewhere will be transformational for the Mongolian economy.
The development of Oyu Tolgoi will depend on the establishment of an interim
electrical power transmission line from China, until supply can
be permanently put in place with a local power plant.
For the Tavan Tolgoi coking coal deposit to be utilized to its complete
potential, the construction of a rail line to the Chinese border
and another to be linked into the rail line through Russia will be essential.
These deficiencies in transportation and power-supply infrastructure
constrain investment and, unless addressed, will dampen economic
growth prospects.
The resource-driven windfall also poses policy and political challenges.
Adherence to key provisions of the newly adopted Fiscal Stability Law,
key provisions of which will come into force in 2013, will test
the government's ability to anchor finances against the tides of
the global commodity cycle.
Moody's report is an annual update to the markets and does not constitute
a rating action. Subscribers can access the report at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_143930.
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Moody's: Spending demands weigh on Mongolia's near-term outlook