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Rating Action:

Moody's confirms Mongolia's Caa1 issuer rating with a stable outlook, concluding review for downgrade

30 Mar 2017

Singapore, March 30, 2017 -- Moody's Investors Service has today confirmed the Caa1 long-term issuer ratings, the (P)Caa1 senior unsecured MTN program and the Caa1 senior unsecured ratings of the Government of Mongolia with a stable outlook. The short-term issuer rating was affirmed at Not Prime. Today's rating action concludes the rating review for downgrade that Moody's initiated on 15 February 2017.

The decision to confirm Mongolia's Caa1 rating balances positive and negative drivers:

- Liquidity pressures have abated following the recent debt exchange transaction, assuming the staff-level agreement is ratified by the IMF Executive Board. Imminent default pressures have subsided.

- However, fiscal and growth pressures are likely to remain higher than forecast at the end of last year, which could encourage a further rise in liquidity pressures over the next 12-18 months.

The decision for a stable outlook on the rating balances the upside risk that IMF-related funding stabilizes Mongolia's external payments position until increased FDI and mining activity lift medium-term GDP growth and foreign currency revenues; against the downside risk posed by Mongolia's very large financing requirements over the next two years, for which it will continue to rely on both external and domestic financing. The stable outlook assumes that the IMF board's approval of the program is obtained, allowing, as a result, loans by other multilateral and bilateral institutions to be disbursed.

The local-currency bond and deposit ceilings remain Ba3. The long-term foreign currency deposit ceiling remains Caa2, while the foreign currency bond ceiling remains B3. All short-term foreign currency ceilings remain Not Prime. These ceilings act as a cap on ratings that can be assigned to the foreign- and local-currency obligations of entities domiciled in the country.

RATINGS RATIONALE

RATIONALE FOR CONFIRMING THE Caa1 ISSUER RATING

Moody's decision to confirm the rating at Caa1 reflects our view that short-term liquidity risks, which posed significant downward pressure on the rating at the start of the review, have abated substantially following the recent debt exchange and in anticipation of the IMF Executive Board's ratification of the staff-level agreement.

Moody's review was triggered by the need to assess the credit implications of increasingly intense liquidity pressures. Specifically, the review aimed to assess how Mongolia intended to serve the 21 March $580 million maturity of government-guaranteed Development Bank of Mongolia LLC's (DBM) notes.

In the event, the DBM notes were exchanged for new government seven-year notes ahead of the 21 March maturity. Moody's concluded that the exchange did not impose a loss on investors relative to the original promise. Moreover, investors choosing not to participate were paid out in full on the maturity of the bond.

The exchange significantly alleviated short-term liquidity constraints. Looking ahead, the level of participation in the new bond issuance demonstrated Mongolia's market access. With evidence that the government has retained market access and the likely availability of multilateral and bilateral financing following the signing of an IMF staff-level agreement, we expect Mongolia to be able to cover its large near-term financing needs.

However, those financing needs remain very large relative to Mongolia's current and prospective resources. Foreign exchange reserves are historically low at $1.0 billion - excluding gold and SDRs. While we expect them to rise over time as the funding opportunities offered by the IMF program materialize, Mongolia will need to continue to roll over a share of its $2.5 billion external debt maturities over the coming 3 years (including the swap line with China's central bank).

Moreover, fiscal and growth challenges remain high -- indeed higher than we expected when we downgraded the rating to B3 on 26 August 2016 and to Caa1 on 18 November 2016. Despite the far-reaching revenue and expenditure measures proposed by the authorities as part of the IMF staff-level agreement, we expect the fiscal deficit to remain in double digits in 2017-18, which will contribute to a rapid increase in the already very high government debt burden. Taking into account DBM debt as a contingent liability that has crystallized on the government's balance sheet, we expect the government's debt burden to peak above 100% of GDP this year from 92.1% in 2016. A levelling off and eventual decline in the debt burden hinges on a severe tightening of fiscal policy in the near-term, and a pick-up in GDP growth from around 2018 onwards. Neither is a foregone conclusion.

Mongolia's economic prospects remain highly dependent on demand for commodities, and more specifically on the fortunes of a small number of mining projects. That concentration of risk poses a threat to Mongolia's credit profile, which has crystallized in recent years. Its legacy remains clear. Economic activity has slowed markedly and will pick up only in the medium term. Real GDP grew by 1.0% in 2016, after 2.4% in 2015 and down from 11.3% on average in 2010-14. We expect fiscal consolidation and monetary policy tightening to weigh on public and private consumption at a time when investment is also slowing. We forecast negative real GDP growth in 2017, at 0.2%.

From 2018 onwards, we assume that real GDP growth will be supported by investment in the Oyu Tolgoi phase 2 and Tavan Tolgoi mining projects. While this investment will initially generate large imports, we assume that it will over the subsequent few years result in a sharp ramp-up in mining production and exports and, importantly, government revenues.

RATIONALE FOR THE STABLE OUTLOOK

The relief from near-term liquidity pressures set against rising fiscal and growth pressures leaves Mongolia's credit profile delicately balanced. Success in achieving fiscal reform and simultaneously laying the ground for growth to recover strongly from 2019 will exert upward pressures on the rating. In the meantime, Mongolia's external liquidity position remains fragile, highly dependent on its ability to continue to instil confidence among official and private sector lenders.

Moody's decision to place a stable outlook on Mongolia's rating reflects those broadly balanced upside and downside risks.

An IMF program will, if ratified by the IMF Executive Board, unlock significant financing from bilateral donors and multilateral development institutions. The IMF has stated that additional funding worth $4 billion would likely become available, which we estimate would cover about one third of gross financing requirements over the next three years. The financial and technical support of multilateral institution would support the government's market access, which should help them to refinance obligations coming due in 2018-19.

The IMF program would also anchor fiscal consolidation prospects and reduces the risk of further slippages. We think that the actions required by the IMF before its Executive Board's approval of the program, such as passing the supplementary budget, will happen, albeit with some delays. Sustained and significant progress towards the program's objectives would support Mongolia's access to external finance from concessional lenders and private investors. This would point to a credit-positive durable improvement in liquidity and external buffers until a marked increase in mining revenues boosts growth and foreign-currency inflows from around 2019 onwards.

However, there are implementation risks to the IMF program, given the short-term economic costs of significant fiscal and monetary policy tightening. Sustaining such a tight policy stance over several years will be politically challenging. Slippages could lead to a suspension in IMF disbursements and renewed weakening in investors' confidence. Moreover, if the economic toll of the measures more than offsets initial spending cuts and revenue-raising measures, this could prevent or slow a material narrowing in the budget deficit.

Furthermore, beside external financing, the government will continue to rely on domestic financing of its deficit. The capacity of financially weak banks' to purchase large amounts of government bonds has yet to be ascertained. Financing costs for the government could rise more rapidly than we currently assume, reigniting liquidity pressures.

WHAT COULD MOVE THE RATING UP/DOWN

Evidence of the government's success in implementing economic and fiscal policy measures which will improve the debt trend, while sustaining growth and placing Mongolia's external financing needs on a more sustainable footing could lead to a positive rating action.

Conversely, downward pressure on the rating could develop in the event of renewed pressures on the government's liquidity position and the balance of payments. Should the IMF Executive Board decide not to ratify the staff-level agreement, that would impose downward pressure on the rating. Relatedly, prolonged delays in bilateral or multilateral support would raise refinancing risks and could also result in a negative rating action.

GDP per capita (PPP basis, US$): 12,178 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.0% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.1% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -15.2% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.0% (2016 Actual) (also known as External Balance)

External debt/GDP: 214.7% (2016 Estimate)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 28 March 2017, a rating committee was called to discuss the rating of the Mongolia, Government of. The main points raised were government liquidity risk and the country's fiscal and external payments positions.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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.

The Local Market analyst for these ratings is Mathias Angonin, +971 4 237 9548.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Marie Diron
Associate Managing Director
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
SUBSCRIBERS: (852) 3551-3077

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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