Singapore, March 16, 2021 -- Moody's Investors Service ("Moody's") has today changed the outlook on
the Government of Mongolia's issuer ratings to stable from negative 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 stable reflects Moody's
viewthat liquidity risks and external pressures have stabilized for the
foreseeable future, albeit at somewhat higher levels than seen prior
to the pandemic. Higher government borrowing requirements resulting
from sizeable stimulus in 2020 were financed primarily through a combination
of concessional sources and a drawdown on fiscal reserves, thus
relieving liquidity pressures. Recent refinancing has also reduced
upcoming maturities in 2021 and 2022. External vulnerabilities
have declined, on the back of a faster than expected recovery in
mining exports, that Moody's expects to continue.
The affirmation of the B3 rating reflects Mongolia's existing credit challenges,
including long-standing external and liquidity risks, as
well as fiscal weaknesses that have increased due to the pandemic.
The economic impact of the coronavirus pandemic and the government's announced
fiscal stimulus measures reversed gains from a broadly balanced government
budget in years leading up to the pandemic. Moreover, weak
governance continues to impede the government's capacity to shelter the
economy and public finances from commodity price cycles that they are
exposed to.
Mongolia's country ceilings remain unchanged: Mongolia's local-currency
country ceilings remain at B1. The two notch gap to the sovereign
rating reflects a strong government footprint in the economy, high
commodity composition in overall revenues, and still-high
external imbalances. The foreign-currency ceiling remains
at B3, representing a two-notch gap to the local currency
ceiling, to take into consideration our assessment of weak policy
effectiveness and high external debt. 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_ARFTL441766
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 STABLE OUTLOOK
Donor support, access to market funding and narrower deficits mitigate
government liquidity risks, albeit from relatively high levels.
Although wider fiscal deficits coupled with debt repayment obligations
resulted in a spike in borrowing requirements to nearly 21% of
GDP in 2020, the government was able to meet these requirements,
primarily due to assistance from multilateral lenders. A debt refinancing
exercise conducted in September last year also resulted in a substantial
reduction of obligations due in 2021 and part of 2022. As a result,
Moody's estimates gross borrowing requirements will reduce to 13.6%
of GDP for 2021, from 16.5% estimated earlier,
and stabilize between 15-16% until 2023, about 3ppt
lower than Moody's earlier expectations.
Beside financing needs being somewhat lower than earlier assumed,
financing sources are also more secure. Continued support from
multilateral lenders will support budgetary expenditures in 2021.
The government expects total financing from such sources to amount to
upwards of $500 million in 2021. Apart from expenditure
cuts arising from a reversal of some stimulus measures undertaken last
year, other sources of budget financing will include savings from
the Stabilization Fund and domestic bond issuance. Moody's
expects that, given the excess liquidity prevailing in the domestic
banking system, demand for government bond issuance will be strong.
With demonstrated access to market funding at reasonable costs,
Moody's expects external market funding to support further refinancing.
Apart from the $133 million remaining maturity in 2021 (post the
debt-refinancing), Mongolia's upcoming refinancing
needs include about $800 million due in 2022 and 2023 each,
and $600 million in 2024. At these levels, Mongolia's
debt maturities are not substantial compared with peers.
Apart from repayment obligations, improved fiscal performance will
support lower overall borrowing requirements. Following a period
of significant deficit reduction between 2016 and 2019, coronavirus-related
fiscal stimulus measures resulted in the deficit widening to over 12%
of GDP in 2020. While this is significantly wider than pre-pandemic
deficits, Moody's expects Mongolia's fiscal deficit
to narrow to 8% of GDP in 2021 and continue on a path of gradual
consolidation thereafter. Deficit reduction will be driven by a
gradual reversal of past spending measures, as well as revenue buoyancy,
particularly on the back of a rebound in the mining sector, which
will drive mineral revenue collections as well as an expansion in nominal
GDP growth.
The stable outlook is also underpinned by receding external vulnerability
risks albeit from relatively high levels.
A narrower current account coupled with financial assistance from official
lenders has led to a faster accumulation of foreign reserves than anticipated
at the start of the pandemic. In particular, after posting
a sharp contraction due to border closures with China, coal exports
recovered in the second half of 2020, while copper and gold exports
also posted year-on-year increases, limiting the export
contraction.
In 2021, stronger growth in both exports and imports will result
in wider current account deficits relative to 2020, although Moody's
estimates deficits in the next four years will narrow to nearly half of
pre-pandemic averages. A steady recovery in China,
Mongolia's largest export market, will continue to support
overall demand for commodities. A rebound would be further boosted
by the operationalization of a railway connecting the Tavan Tolgoi coking
coal mine to the Chinese border, scheduled to be completed by the
end of 2021, easing transportation bottlenecks.
For 2021, Moody's expects foreign exchange reserves to increase
to $4.6 billion, from just under $4.0
billion at the end of 2020. Coupled with the extended repayment
schedule, this will result in the Moody's External Vulnerability
Indicator, the ratio of maturing external debt to reserves,
moderating to 116% in 2021 from 237% in 2020. Moody's
expects this ratio to hover around 150-180% over 2022-23
indicating that although reserve adequacy has improved and stabilized,
it will remain a credit constraint.
RATIONALE FOR THE B3 RATING
The B3 rating balances prevailing liquidity pressures and external and
fiscal vulnerabilities, against improvements made over recent years
in the debt financing strategy.
Moody's expects government debt to rise to nearly 75% of GDP in
2021, and debt affordability to weaken somewhat, acting as
a setback to improvements in fiscal strength that had occurred in the
three years preceding the pandemic. A more pronounced increase
in the debt burden will be prevented by a resumption in strong nominal
GDP growth and a recovery in mining revenues. Instead, the
debt burden will fall gradually in the next few years, to just over
70% of GDP by 2024, supported by deficit reduction and steady
economic growth.
Mongolia's potential growth continues to represent an underlying
credit strength, although dependent on large projects proceeding
as planned beyond 2020. Moody's assumes no major changes to the
planned production schedule for Oyu Tolgoi -- the country's
largest copper mine -- notwithstanding ongoing negotiations to amend
the investment agreement. In spite of the 5.4% contraction
in growth over 2020, growth prospects in 2021 and beyond remain
bright. Moody's expects growth in 2021 to expand at 6.0%
year-on-year.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Mongolia's ESG Credit Impact Score is highly negative (CIS-4),
driven by a high exposure to environmental risks, a moderately negative
social risk issuer profile score, and a weak governance profile.
Mongolia's exposure to environmental risks is highly negative (E-4
issuer profile score), related to an economy that is highly dependent
on the production and exports of hydrocarbons, with implications
for waste and pollution levels. Mongolia is also vulnerable to
water scarcity driven by mineral extraction, deforestation,
and desertification.
Exposure to social risks is moderately negative (S-3 issuer profile
score). The uneven distribution of incomes, is balanced by
a young population coupled with a strong social safety net that has enhanced
the provision of health and education benefits.
Mongolia has a highly negative governance profile score (G-4 issuer
profile) reflecting weak executive institutions and policy effectiveness
against ongoing structural reforms. A high government debt burden
and other immediate liquidity pressures constrain the sovereign's
financial capacity to respond to environmental and social risks
GDP per capita (PPP basis, US$): 12,551 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 5.1% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.2%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -0.6%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -15.4% (2019 Actual)
(also known as External Balance)
External debt/GDP: 218.7% (2019 Actual)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 11 March 2021, a rating committee was called to discuss the rating
of the Mongolia, Government of. The main points raised during
the discussion were: The issuer has become less susceptible to event
risks, with receding government liquidity and external vulnerability
risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
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.
FACTORS THAT COULD LEAD TO A DOWNGRADE
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.
The principal methodology used in these ratings 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
The List of Affected Credit Ratings announced here are a mix of solicited
and unsolicited credit ratings. Additionally, 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_ARFTL441766
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:
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Documents
• Disclosure to Rated Entity
• Endorsement
• 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.
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_1243406.
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
