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Rating Action:

Moody's changes Mongolia's outlook to negative from stable; affirms B3 rating

08 May 2020

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

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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