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Rating Action:

Moody's downgrades Mongolia's sovereign rating to B2; outlook negative

Global Credit Research - 17 Jul 2014

NOTE: On July 17, 2014, following initial publication, the press release was corrected as follows: In the first sentence of the second paragraph, “senior unsecured” was added to describe the rating. Revised release follows.

Singapore, July 17, 2014 -- Moody's Investors Service has downgraded Mongolia's foreign currency government bond rating to B2 from B1. The outlook remains negative. Concurrently, the government's issuer rating has been downgraded to B2. Mongolia's senior unsecured rating has been lowered to B2 and the government's senior unsecured MTN rating to (P)B2. The issuer's short-term rating remains at Not Prime.

In a related rating action, Moody's has downgraded the senior unsecured rating of the government-owned Development Bank of Mongolia LLC (DBM) to B2 from B1. The outlook remains negative. DBM's senior unsecured rating has been lowered to B2 and its senior unsecured MTN rating to (P)B2. Since DBM's payment obligations carry a credit guarantee of the Government of Mongolia, its debt obligations justify a rating at the same level.

The long-term local currency country risk ceiling remains unchanged at Ba3. The long-term foreign currency deposit ceiling is revised to B3 from B2, while the foreign currency bond ceiling has been revised to B1 from Ba3. All short-term ceilings remain at 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

Moody's decision to downgrade Mongolia is driven by the country's strained external liquidity position, as reflected by a sharp loss in foreign-exchange reserves. Expansionary monetary and fiscal policies have added to demand pressures, fueled inflation, and heightened spillover risks to the banking system and the balance of payments. Accompanied by a continued rise in the external debt burden, these factors increase the country's vulnerability to external and domestic shocks relative to rating peers.

First driver -- A sharp deterioration in the external liquidity position

Total foreign reserves have fallen rapidly, to $1.6 billion in May 2014 from $2.2 billion at the start of the year, in spite of a narrowing current-account deficit. The sharp pace of deterioration comes as foreign direct investment (FDI) has more than halved from levels last year. Expansionary policies have fueled demand for imports, adding further pressure to the external reserve position. Reserves would most likely be lower, were it not for the Bank of Mongolia drawing down on a bilateral swap facility with the People's Bank of China.

The investment regime remains unpredictable, suggesting that FDI will remain subdued at least over this year. Further ahead, instability in the investment regime threatens to dampen the development of the mining sector. This would have negative consequences on Mongolia's ability to ramp up foreign-exchange export earnings to repay its external debt. We expect reserves to remain weak this year, significantly increasing Mongolia's external vulnerabilities.

Mongolia's rising external debt repayment burden is compounded by the decline of official foreign-exchange reserves to a low level. The development of Mongolia's mineral resources will play an increasingly important role in this context. Moody's External Vulnerability Indicator -- which gauges the adequacy of reserves with respect to maturing external debt obligations over the next year -- has risen to an estimated 130% in 2014 and will increase further to 196% in 2015, significantly above a prudent 100% threshold for systems that are heavily dependent on foreign creditors.

Second driver -- Expansionary policy stance

The central bank's pursuit of expansionary monetary policies since 2013, including liquidity injections to banks, low-cost mortgage loans, and support to the construction and real estate sectors, has boosted demand. Although it is gradually withdrawing some programs, inflationary pressures continue to build, while credit is still growing at a rapid pace. This increases pressure on the balance of payments, raising the risk of capital flight, and further weakens the external payments position. Given regulatory forbearance in the provision of credit and weakening asset quality, there could also be spillover risks for the banking system.

Expansionary monetary policies are accompanied by off-budget spending and investment that circumvent fiscal responsibility legislation and are resulting in a buildup in government liabilities.

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK

The negative outlook reflects the risk of: (1) a continuing decline in foreign-exchange reserves that increases Mongolia's vulnerability to external shocks, (2) continued rapid credit growth and persistent inflationary pressures, and (3) sustained fiscal imbalances over the near term through large off-budget spending that would result in a deterioration in debt metrics.

WHAT COULD CHANGE THE RATING -- UP/DOWN

Key factors that could prompt an upward movement in the rating include: (1) greater price and exchange rate stability, (2) a replenishment of official foreign-exchange reserves, (3) a track record of adherence to the fiscal rule, and (4) steady mineral resource development under a stable and predictable investment regime that would improve the country's long-term fiscal and economic prospects.

Triggers for a downward movement in the rating include: (1) a continuation of expansionary monetary policies that would result in the persistence of high loan growth and inflationary pressures, (2) a lack of adherence to fiscal responsibility legislation, and (3) the persistence of unpredictable foreign investment policies that constrain the development of the mineral export sector and strain the official international reserve position.

GDP per capita (PPP basis, US$): 5,885 (2013 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 11.7% (2013 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 12.3% (2013 Actual)

Gen. Gov. Financial Balance/GDP: -1.4% (2013 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -26.5% (2013 Actual) (also known as External Balance)

External debt/GDP: 157.7% (2013 Actual)

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 14 July 2014, 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 increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy 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 rating action, if applicable.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Anushka Shah
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
SUBSCRIBERS: (852) 3551-3077

Bart Oosterveld
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

Moody's downgrades Mongolia's sovereign rating to B2; outlook negative
No Related Data.
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