NOTE: On September 26, 2016 the press release was corrected as follows: The following was added as the sixth paragraph of the press release: “The long-term local currency country risk ceiling remains unchanged at Ba3. The long-term foreign currency deposit ceiling is revised to Caa1 from B3, while the foreign currency bond ceiling is unchanged at B1. 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.” Revised release follows.
Singapore, August 26, 2016 -- Moody's Investors Service has today downgraded Mongolia's
government issuer rating to B3 from B2, and initiated a review for
further downgrade.
The key driver for the downgrade is the sharp deterioration in fiscal
metrics, which Moody's does not expect will reverse materially in
the next few years. Compounded by weak growth and already very
low foreign exchange buffers, this will significantly exacerbate
fiscal challenges and liquidity risks facing the government.
The review will allow Moody's to assess the speed and effectiveness
of the policy response to these heightened challenges, and their
implications for growth and the management of external liquidity,
which would depend partly on the availability and cost of external financing.
Moody's expects to complete the review within three months.
Concurrently, Moody's has downgraded the government's senior unsecured
debt rating to B3 and the senior unsecured MTN rating to (P)B3.
The review for downgrade also applies to these ratings. The short-term
issuer rating remains unchanged at Not Prime.
The long-term local currency country risk ceiling remains unchanged at Ba3. The long-term foreign currency deposit ceiling is revised to Caa1 from B3, while the foreign currency bond ceiling is unchanged at B1. 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
RATIONALE FOR DOWNGRADE TO B3: DETERIORATING DEBT AND FISCAL METRICS
Mongolia's core fiscal and economic fundamentals have worsened materially
since the rating was affirmed in January of this year. That trend
exacerbates the sovereign's already high exposure to a reversal
in investor sentiment, exacerbating domestic and external liquidity
pressures.
Mongolia's fiscal deficit has widened very significantly in recent
months, due to revenue underperformance and a sharp increase in
spending in the first half of this year, which coincided with the
run-up to national elections at the end of June. This will
raise the government's near-term financing needs and add
to external vulnerability pressures. While some of the spending
is likely one-off rather than recurrent, we estimate that
the government's fiscal consolidation efforts will now start from
a much weaker base, with a budget gap of around 15% of GDP,
versus our earlier expectations of about 5% of GDP for 2016.
In 2017, we assume that growth in expenditure will slow markedly
while revenues may recover somewhat. Still, we expect the
deficit to be only marginally smaller, at around 14% of GDP.
Larger fiscal deficits will translate into a marked increase in the debt
burden. In addition, with more than three-quarters
of government debt denominated in foreign currency, the recent depreciation
in the Mongolian togrog will inflate the value of existing debt.
Any further weakening of the currency would raise the debt burden further.
Higher domestic interest rates will also push up refinancing costs.
Overall, we estimate that government debt could rise to 71%
of GDP in 2017 from 63% in 2015, considerably higher than
what we projected previously and above the 53% median debt-to-GDP
ratio amongst B-rated sovereigns in 2016.
Debt affordability, as measured by interest payments to revenues,
has already worsened significantly over recent years, to 12.2%
in 2015 from 2.5% in 2012. The rise in risk premia
that we think will largely persist for some time implies that debt servicing
costs will deteriorate further.
Efforts to strengthen the fiscal position will be more challenging in
the current adverse growth environment. The 450 basis point hike
in central bank interest rates on 18 August, and any further tightening
of monetary policy should pressure on the exchange rate persist,
will likely dampen GDP growth in the next two years. Already,
recent developments point to a weaker and delayed recovery compared with
our previous expectations. On the back of a decline in mining and
construction activity, GDP growth moderated to 1.4%
year-on-year during the first half of 2016, from 2.0%
during the same period in the last year. With little prospect of
an imminent pick-up in the mining sector, we expect real
GDP for the full year to rise 1.5% year-on-year,
weaker than the 2.8% that we previously forecast.
In 2017 and 2018, the implementation of the Oyu Tolgoi copper mining
project should lead to some pickup in growth, pushing GDP growth
up to around 3.5-5.0%. This would still
remain significantly below Mongolia's GDP growth in the past decade
and, in turn, weigh on the effectiveness of fiscal consolidation
measures.
In an environment of sharply higher government financing needs,
uncertainty about the nature and effectiveness of policies to reduce them
and weaker growth, already very low foreign exchange reserves could
come under further pressure and accentuate already material government
liquidity risks.
RATIONALE FOR REVIEW TO DOWNGRADE
Recent developments have created considerable uncertainty regarding both
the current fiscal position in Mongolia and its future trajectory.
That uncertainty has in turn undermined investor confidence in Mongolia's
credit profile, potentially impeding its access to international
debt markets. The review will allow Moody's to determine
whether the rating remains appropriately positioned in the 'B'
range or whether external financing pressures are more consistent with
a Caa1 rating.
While the new government has announced its intention to narrow deficit
and debt levels, and its wider deficit projections suggest its willingness
to be more transparent than previous administrations in its calculation
of budgetary data, a high degree of uncertainty exists about the
level and nature of the budget gap, the impact on the government's
debt burden and how the government plans to achieve its broader economic
policy goals.
The review period will allow Moody's to assess the government's
plans to address the worsening position, and their impact on growth
and external metrics. More details on the 2016 Budget, which
is due within the review period, should also emerge.
Moody's will also gauge the impact of the fiscal deterioration on
Mongolia's ability to continue to meet its substantial external
finance needs over the coming years, and the implications for its
foreign exchange reserves buffer.
WHAT COULD STABILIZE THE RATING AT THE CURRENT LEVEL
At the end of the review period, Moody's could maintain the current
B3 rating with a stable outlook, if it were to conclude that the
government's response to the worsening fiscal position was likely
to stabilize the fiscal position, support the resumption in growth
and inward investment and allow Mongolia to retain access to international
debt markets at affordable rates.
WHAT COULD STABILIZE THE RATING AT THE CURRENT LEVEL, WITH A NEGATIVE
OUTLOOK
Moody's could maintain the current B3 rating with a negative outlook if
it were to conclude that, notwithstanding the emergence of policies
intended to stabilize the fiscal position and support growth, there
were likely to remain persistent negative pressure on Mongolia's
credit metrics over the next 12-18 months, whether related
to the effectiveness of fiscal tightening, the impact on GDP growth
or a diminishing likelihood for Mongolia to meet its widening gross borrowing
requirements and ability to refinance its external debt repayments.
WHAT COULD CHANGE THE RATINGS DOWN
Triggers for a further downgrade at the end of the review would most likely
stem from the lack of a well-defined set of policies aimed at curbing
rising fiscal deficits and the growing debt burden, heightening
the risk of investor confidence quickly deteriorating and external metrics
and liquidity worsening sharply, to such an extent that Mongolia's
credit metrics are no longer comparable with B3-rated sovereigns.
GDP per capita (PPP basis, US$): 12,147 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.3% (2015 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.9%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -5%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.8% (2015 Actual)
(also known as External Balance)
External debt/GDP: 185.6% (2015 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 23 August 2016, 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 fiscal or financial strength,
including its debt profile, has materially decreased. The
issuer's economic fundamentals, including its economic strength,
have not materially changed. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings 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
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.
Anushka Shah
Asst Vice President - 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
Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077
