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Rating Action:

Moody's affirms Mongolia's B3 rating and stable outlook

21 Jan 2020

Singapore, January 21, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Mongolia's ("Mongolia") B3 long-term issuer ratings and senior unsecured ratings and the (P)B3 senior unsecured MTN program rating; and maintained the stable outlook. The short-term issuer ratings are affirmed at Not Prime.

The B3 rating incorporates Mongolia's still weak albeit improving debt and fiscal metrics and weak institutions and governance, balanced by strong growth potential.

The stable outlook indicates balanced risks in the near term, including greater financial buffers than seen during past episodes of financing stress against still significant external and government liquidity risks. Moody's expects foreign exchange reserves to be sufficient to meet external debt obligations and growth to remain relatively strong, notwithstanding a projected moderation. From 2021, the public sector debt refinancing needs will increase significantly. The stable outlook assumes that the government will be able to refinance its external debt obligations at affordable costs as they begin to come due.

Mongolia's country ceilings remain unchanged: the local-currency bond and deposit ceilings remain at Ba2, the long-term foreign currency deposit ceiling at Caa1, and the long-term foreign currency bond ceiling at B1; all short-term foreign currency ceilings also remain unchanged at Not Prime.

RATINGS RATIONALE

RATIONALE FOR B3 RATING

TIGHTER FISCAL POLICY TO KEEP DEBT, DEFICT METRICS IN-LINE WITH PEERS, ALBEIT AT WEAK LEVELS

Moody's expects government debt to continue to moderate to around 57.5% in 2020 and stabilize around these levels, from close to 80% of GDP in 2015-16, as sustained nominal GDP growth offsets ongoing fiscal deficits. This is in line with the B3-median of 57.2% of GDP.

Significant tightening since fiscal deficits spiked in 2016, has resulted in a marked narrowing in both deficits and the debt burden both through an improvement in revenue collection and sharp spending cuts. Together, these measures have contributed to a nearly balanced fiscal position, with deficits at less than 1% of GDP in 2019 and 2018, significantly narrower than deficits of over 13% and 5% of GDP in 2016 and 2017, respectively.

Moody's expects the budget deficit to widen in the next few years, to 4.8% and 6.4% of GDP in 2020 and 2021 respectively, as moderate commodity prices and uncertainty around copper production dampen revenue growth, while spending accelerates, in particular before elections due in June 2020.

However, the fiscal tightening of the last few years has changed the debt dynamics in a favourable direction, by contributing to lower the cost of debt well below nominal GDP growth. Unless fiscal slippage is much larger than Moody's currently expects, the projected deficits are consistent with a stable debt burden.

WEAK INSTITUTIONS AND GOVERNANCE ARE AN INHERENT RATING CONTRAINT

While fiscal and monetary policy tightening has improved Mongolia's fiscal buffers, the sovereign's institutions and governance remain weak, a significant rating constraint. The implementation of reforms that would reduce Mongolia's vulnerability to commodity price cycles has been partial and, at this stage, is not broadly embedded in the conduct of macroeconomic policy.

A key source of uncertainty to the future reform trajectory comes from the Extended Fund Facility with the IMF that began in May 2017. While the program has identified and anchored reforms thus far, delays to the disbursal of funding following the sixth review originally due in September 2018 raise the possibility of the program lapsing without achieving full completion. The review has been held up by issues surrounding the recapitalization of banks, following the 2018 asset quality review that identified capital shortfalls.

Beside the potential pressure on access to financing explained below, there is no clarity about the framework for further reform that the government would pursue in the absence of an IMF program.

Ahead of the parliamentary elections in June, government spending will likely increase as has occurred in the past, with no certainty as yet about the capacity of the elected government to rein in spending later or about the direction of fiscal and monetary policy in general. For instance, the government's budget targets for 2020 factor in a significant increase in spending, which will result in a wider fiscal deficit.

The electoral cycle could also precipitate changes to the Oyu Tolgoi mining agreement, which a government-affiliated parliamentary working group is currently calling for.

GROWTH WILL REMAIN ROBUST DESPITE SOFTENING COMMODITY PRICES

Strong growth will mitigate the risks related to persistent fiscal and institutional weaknesses.

Real GDP growth was over 6.0% in 2019 and Moody's projects robust growth to continue at 5.5% in 2020, one of the fastest rates among B3-rated sovereigns.

Moody's growth forecasts take into consideration moderate commodity prices, slower demand from China, and shifting demand and supply dynamics for Mongolia's key mining exports - coal and copper. Although demand for coal will soften as China moves towards greater reliance on renewable sources of energy, nearly all of Mongolia's coal exports to China are coking coal, used primarily for steel, the Chinese demand for which has remained relatively stable. Meanwhile, demand for copper will be supported by global moves toward battery electric vehicles.

A key driver of Mongolia's longer-term growth trajectory remains prospects from the Oyu Tolgoi mining project. Challenges to the second phase implementation, including time and cost overruns, and potential changes to the original mining agreement present downside risks to the growth outlook. Moody's macroeconomic projections are premised on the assumption that production will continue notwithstanding some occasional delays.

Medium-term growth will also be supported by key infrastructure projects, particularly in the transport sector -- for instance, railways connecting the largest coal mine, Tavan Tolgoi, to the Chinese border -- that will reduce trade bottlenecks and improve efficiency. Similarly, the construction of new roads and a power and coal washing plant will raise productivity. The government also has plans to revamp and upgrade major ports, improving capacity and access.

RATIONALE FOR THE STABLE OUTLOOK

BUFFERS TO REMAIN ADEQUATE TO MANAGE UPCOMING EXTERNAL PAYMENTS

The financial buffers rebuilt over the past two years offer some time to the government to manage external vulnerabilities, which drive event risk for Mongolia. As external debt repayments rise, Mongolia's credit profile will be increasingly susceptible to a potential change in access to financing from international and bilateral creditors and financial markets.

Foreign exchange reserves increased to close to $4 billion (including gold) at the end of 2019 from $1 billion in February 2017. Though reserve accretion has slowed over the past year due to delays in donor financing, a narrower trade surplus, and sales by the central bank to limit exchange rate pressures, reserves will remain adequate to meet upcoming external obligations if bilateral support and access to financial markets at moderate costs are maintained.

In the near term, Moody's assessment that reserves will remain adequate is based on its projections of a broadly stable current account deficit and ongoing financing from bilateral creditors, while taking into account ongoing delays to disbursements by the IMF as well as a possible disruption to funding from some other multilateral institutions. In addition, Moody's expects the central bank's -- the Bank of Mongolia - swap line with the People's Bank of China, which expires in August 2020, will be renewed, given the two countries' continued bilateral relations.

Debt maturities will start to mount in 2021 and spike in 2023, when bonds worth $1.3 billion mature. The stable outlook assumes that bilateral funding remains available and anchors financial market confidence to allow Mongolia to refinance its debt at affordable costs. Disruptions to access to funding and investors' appetite for Mongolian assets would raise external vulnerability risks and weigh on the credit profile.

ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are material for Mongolia, since moves towards renewable energy and electric vehicles will likely drive strong demand for some of its mineral products, particularly copper, significantly lifting its growth potential. However, Mongolia is also exposed to environmental risk. Agriculture, which is also an important sector for the Mongolian economy, is negatively affected by land degradation, which hurts the livestock industry and increases its vulnerability to extreme weather conditions and climate change.

Social considerations are not material for Mongolia. While income levels are low on average and the distribution of proceeds from the mining sector is uneven, macroeconomic measures of income inequality such as the Gini coefficient do not signal significant exposure.

Governance considerations are material to Mongolia's credit profile and primarily relate to low credibility of fiscal targets, the absence of a track record of adherence of major reforms, and past experience of pro-cyclical policies linked to electoral and commodity price cycles. High levels of corruption and factious politics also present broad governance risks.

FACTORS THAT COULD LEAD TO AN UPGRADE

Upward rating pressure would likely develop if sustained and effective implementation of structural reforms pointed to a significant increase in Mongolia's financial buffers and increased the likelihood that even in an adverse commodity price environment, macroeconomic volatility and fiscal pro-cyclicality would be reduced.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Increasing risks to Mongolia's access to financing at affordable costs ahead of significant external debt maturities would put downward pressure on the rating.

Indications that the improvement in fiscal and debt metrics of the last few years was likely to reverse with a possible significant renewed increase in the debt burden would also weigh on Mongolia's credit profile.

GDP per capita (PPP basis, US$): 13,451 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6.9% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 8.1% (2018 Actual)

Gen. Gov. Financial Balance/GDP: 0.9% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -16.9% (2018 Actual) (also known as External Balance)

External debt/GDP: 220.0% (2018 Actual)

Economic resiliency: b1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 16 January 2020, a rating committee was called to discuss the rating of the Mongolia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Anushka Shah
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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