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Rating Action:

Moody's assigns B3 rating to Mongolia's US-dollar denominated notes

24 Jun 2021

Singapore, June 24, 2021 -- Moody's Investors Service ("Moody's") has assigned a rating of B3 to the proposed senior unsecured, US dollar-denominated notes to be issued by the Government of Mongolia ("Mongolia"). The notes will rank pari passu with all of the Mongolia's current and future senior unsecured external debt. The proceeds of the notes will be used to fund a tender offer to repurchase a portion of its bonds maturing in 2022 and 2023.

The ratings mirror Mongolia's issuer rating of B3 with a stable outlook.

RATINGS RATIONALE

Mongolia's (B3 stable) credit profile incorporates a narrowly diversified economy and weak debt and fiscal metrics, balanced by strong growth potential.

Broadly balanced government budgets and high nominal GDP growth prior to the coronavirus pandemic supported a reduction in the debt burden from high levels, to around 61% of GDP in 2019. In the current shock, weaker growth due to the impact of the coronavirus on global and Chinese demand for coal and the government's announced fiscal stimulus measures have resulted in an uptick in the debt burden. Moody's expects government debt to rise to around 75% of GDP in 2021, delaying more marked improvements in weak fiscal strength.

A more pronounced increase in the debt burden will be prevented by a resumption in strong nominal GDP growth. Following a contraction in 2020, Moody's expects growth to return towards Mongolia's high potential rates in 2021 backed by strong commodity prices and relatively contained infection rates. High growth continues to represent an underlying credit strength, although dependent on large projects proceeding as planned beyond 2020. Moody's assumes that no major change to the mining agreement for Oyu Tolgoi - the country's largest copper mine - will occur.

The B3 rating also assumes that external financing will be available from multilateral and bilateral lenders, preventing an escalation of external risks. In addition, it is based on the expectation that Mongolia will meet all its direct and indirect debt obligations in the foreseeable future.

ISSUER RATING OUTLOOK

The stable outlook reflects liquidity risks and external pressures that have stabilized for the foreseeable future, albeit at levels higher than seen prior to the pandemic. Higher government borrowing requirements resulting from sizeable stimulus measures in 2020 were financed primarily through a combination of concessional sources and a drawdown on fiscal reserves, thus relieving liquidity pressures. A debt refinancing exercise conducted last year, has also reduced upcoming maturities in 2021 and 2022. External vulnerabilities have receded, on the back of a faster than expected recovery in mining exports, that we expect will continue.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are material for Mongolia. A global shift 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, 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. Moody's views the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. For Mongolia, the shock mainly materializes mainly through a fall in commodity prices and tightening in financing conditions.

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

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The stable outlook indicates that risks are balanced.

However, a consistently falling debt burden accompanied by steady improvements in debt affordability would alleviate fiscal constraints and drive upward rating momentum. These indications would likely relate to improvements in the management of domestic public finances, containing the government's funding requirements and the economy's external financing needs. Efforts towards gradually diversifying the economy away from its reliance on commodities that reduce growth volatility and susceptibility to boom-bust economic cycles would also likely be a trigger for upward rating action.

Conversely, a rating downgrade could transpire from widening gross borrowing requirements significantly above our baseline assumptions, and/ or rising government liquidity risks that point to difficulties in meeting these borrowing needs. Persistent external financing gaps that threaten macroeconomic stability would also exert downward rating pressures. A sustained shock to growth, for instance through the derailment of large mining projects, would also be a trigger for downward rating action.

This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on www.moodys.com, under the research tab, for related economic statistics included in rating announcements published after June 3, 2013.

This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on www.moodys.com, under the research tab, for related summary rating committee minutes included in rating announcements published after June 3, 2013.

The principal methodology used in this rating was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management: YES

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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: 44 20 7772 5456
Client Service: 44 20 7772 5454

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.
© 2022 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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