Singapore, May 08, 2020 -- Moody's Investors Service ("Moody's") has today changed the outlook on
the Government of Mongolia's issuer ratings to negative from stable
and affirmed the long-term B3 issuer and foreign currency senior
unsecured bond ratings and the (P)B3 senior unsecured MTN program rating.
The short-term issuer ratings are affirmed at Not Prime.
The decision to change the rating outlook to negative reflects rising
external vulnerability risks related to a sharp fall in export revenue
at a time when access to external financing is highly uncertain,
threatening already weak foreign exchange reserves adequacy. Moreover,
the government's borrowing requirements will increase markedly,
in part to fund a large stimulus package, which raises liquidity
risks.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, and falling asset prices are creating a
severe and extensive credit shock across many sectors, regions and
markets. The combined credit effects of these developments are
unprecedented. Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety. For Mongolia, pressures on
the sovereign's external position exacerbates external vulnerability
risks, particularly ahead of large repayment obligations on external
debt that will start to come due in 2021.
The affirmation of the B3 rating reflects Mongolia's existing credit
challenges, including long-standing external and liquidity
risks. A broadly balanced government budget coupled with high nominal
GDP growth in recent years has reduced the debt burden from high levels.
However a slowdown in growth this year due to the impact of the coronavirus
on global and Chinese demand for coal and the government's announced
fiscal stimulus measures will increase borrowing requirements and prevent
a further decline in the debt burden, delaying potential improvements
in weak fiscal strength. Moreover, weak governance and policy
effectiveness continue to impede the government's capacity to shelter
the economy and public finances from commodity price cycles.
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.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL423975
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
RATIONALE FOR THE NEGATIVE OUTLOOK
FALL IN EXPORT REVENUE PUTS PRESSURE ON RESERVES AND EXACERBATES EXTERNAL
VULNERABILITY
The negative outlook is underpinned by a rise in external vulnerability.
Moody's expects a material widening in Mongolia's already
large current account deficit, raising the country's reliance
on external debt funding, the availability and cost of which is
particularly uncertain at the moment. Intensifying strains on Mongolia's
capacity to secure financing for its imports and/or external debt commitments
would threaten macroeconomic stability.
The price of Mongolia's main commodities, coal and copper,
has fallen sharply and is unlikely to recover rapidly. Combined
with exports restrictions and lower demand from China and globally,
Moody's expects a sharp drop in commodity export proceeds this year,
leading to a widening in the current account deficit to 15-20%
of GDP.
From a build-up in reserves over the past three years, to
$4.4 billion as of February 2020, Moody's now
estimates foreign reserves will end the year at $3.0 billion,
assuming the government secures financing for its fiscal stimulus from
official lenders.
In the current environment of heightened uncertainty about Mongolia's
capacity to generate export revenue and obtain external financing at moderate
costs and in a timely fashion, there is a risk that funding pressures,
not yet acute, will increase. In mid-May, an
upcoming $500 million maturity for a government-guaranteed
bond may be partly met by the central bank, which will have a manageable
impact on foreign reserves. But beyond this year, funding
stress may come from maturing external bonds, which the government
intends to refinance. Moody's estimates total maturing external
sovereign bonds will amount to 18% of reserves in 2021, increasing
further in 2022. Moody's projects its External Vulnerability
Indicator, the ratio of maturing external debt to reserves,
to rise above 200% in 2021 from around 140% in 2020.
Reserve coverage will drop to around 7 months of imports in 2020 by Moody's
calculations, from 8.6 months at the end of 2019.
While not Moody's current expectation, indications that the government
was likely to participate in debt relief initiatives which the rating
agency concluded were likely to entail losses for private sector creditors
would be negative for the rating.
HIGHER BORROWING REQUIREMENTS, INCLUDING THE FINANCING OF A LARGE
STIMULUS PACKAGE, RAISE LIQUIDITY RISKS
Mongolia's immediate financing needs are higher than Moody's anticipated
at the start of this year, primarily driven by a significantly wider
fiscal deficit.
In response to the coronavirus outbreak, the government has announced
a large fiscal stimulus plan of about MNT 5.0 trillion [1]
($1.8 bn, or 12.5% of Moody's
estimated 2020 GDP). Factoring in a contraction in revenues,
and some capital spending reallocation, higher spending will result
in the fiscal deficit widening to 8.5% of GDP this year
compared to Moody's expectation of a 4.8% of GDP deficit
at the start of the year.
Wider deficits will add to the government's gross borrowing requirements,
which Moody's estimates at 12.5% of GDP this year,
and which will continue to climb to peak at 18.5% of GDP
in 2022 as external bond repayments come due. Moody's expects
that these financing needs will be sourced from a mix of external financing,
in particular from multilateral and bilateral lenders and domestic sources.
If concessional sources do not fully materialize and authorities maintain
their planned stimulus measures, liquidity strains will increase.
Meanwhile, tapping into the domestic market will weigh on debt affordability
metrics. This will be reflected in the ratio of interest payments
to revenues, which Moody's estimates will rise close to 10%
in 2020, and continue to increase over the next few years.
RATIONALE FOR AFFIRMING THE B3 RATING
The B3 rating balances emerging external and liquidity pressures against
recent improvements in debt levels and affordability, which provide
some degree of fiscal flexibility.
Broadly balanced government budgets and high nominal GDP growth in recent
years have reduced the debt burden from high levels, to around 60%
of GDP in 2019 [2]. In the current shock, weaker growth
due to the impact of the coronavirus epidemic on global and Chinese demand
for coal and the government's announced fiscal stimulus measures
will increase borrowing requirements and prevent a further decline in
the debt burden. Moody's expects government debt to rise
to around - or slightly above - 70% of GDP,
and debt affordability to weaken somewhat, which will at the very
least delaying potential improvements in weak fiscal strength.
A more pronounced increase in the debt burden will be prevented by a resumption
in strong nominal GDP growth, at double digit rates from 2021.
In particular, after GDP growth slows to close to 1% this
year, Moody's expects growth to return towards Mongolia's
high potential rates, which continue 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 take place after the forthcoming parliamentary
elections.
The affirmation of the B3 rating also assumes that external financing
will be available from multilateral and bilateral lenders, preventing
a further 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.
The B3 rating incorporates a weak institutional framework, that
has historically amplified susceptibility to boom-bust cycles.
The coronavirus outbreak has triggered such a cycle with a large drop
in commodity prices, at a time when government spending is being
ramped up ahead of parliamentary elections scheduled for June.
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 RATINGS
Increasing confidence that Mongolia will be able to refinance upcoming
external debt maturities at moderate costs while preserving macroeconomic
stability would likely lead to a return to a stable rating outlook.
Such a view might be driven by improvements in the management of domestic
public finances, containing the government's funding requirements
and the overall economy's external financing needs.
Downward rating pressures would likely transpire from persistent external
financing gaps that threaten macroeconomic stability. A more severe
deterioration in fiscal and debt metrics than Moody's currently
expects would add to such pressures. While not Moody's current
expectation, indications that the government was likely to participate
in debt service relief initiatives which Moody's concluded were likely
to entail losses for private sector creditors would be negative for the
rating.
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: 0.8%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -16.8% (2018 Actual)
(also known as External Balance)
External debt/GDP: 219.3% (2018 Actual)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 04 May 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 increasingly
susceptible to event risks.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/research/Sovereign-Ratings-Methodology--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
The List of Affected Credit Ratings includes additional disclosures that
vary with regard to some of the ratings. Please click on this link
https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL423975
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Lead Analyst
• Releasing Office
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 ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings include both solicited and unsolicited ratings. As
a result, Moody's considers the Rated Entity and/or any Related
Third Party to be participating in the ratings process, thereby
providing general access to internal documents and management.
https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL423975.
For additional information, please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
REFERENCES/CITATIONS
[1] Ministry of Finance, April 2020
[2] Ministry of Finance, April 2020
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
