Mongolia’s refinancing risks deepen as tugrik plunges, warns Fitch

By bne IntelliNews August 24, 2016

The sharp depreciation of the Mongolian tugrik, which has lost more than 20% of its value since end-June, underscores the country's strained external liquidity and escalating refinancing risks, Fitch Ratings said on August 23.

Fitch, which cut Mongolia's sovereign rating to 'B' in November 2015, said the currency volatility reflects deep short-term external liquidity constraints and economic challenges, while immediate solvency risk is mitigated by the fact that the sovereign does not face significant external bond maturities until at least early 2017. 

Fitch believes the country will continue to face heightened short-term external liquidity and refinancing risks also remain high. The country’s policy priorities may have moved towards stabilising these ongoing pressures, as highlighted by the central bank’s decision to raise its policy rate by 450bp to 15%.

“The immediate impact from the interest rate hike on the banks' pre-impairment profitability could be mildly positive, while the impact on their liquidity should remain containable as these lenders can rely on deposits and bilateral funding,” the report reads.

If the interest rate hike fails to stop the tugrik's depreciation, Mongolian banks' loan quality will remain under pressure “with the system-wide NPL ratio likely to easily exceed Fitch's earlier expectation of 9% by end-2016”. Moreover, salary-backed loans could become more vulnerable, as the authorities have announced significant salary cuts for staff at government agencies and state-owned enterprises.

Lenders with large retail exposures such as “State Bank (B-/Stable) and Khan Bank (B/Negative) could therefore also see their impaired retail loan ratios rise”. The ratings agency said it is keeping a negative outlook on the banks whose ratings are not support-driven to reflect the pressure on asset quality from the weakening operating environment. 

The agency suggests that the country’s 2016 fiscal performance has fallen far from the government’s commitment to stick to a 4% budget deficit ceiling made under the recently implemented Fiscal Stability Law.

On the plus side, Mongolia's long-term growth prospects will be significantly enhanced by the ongoing development of the $6bn Oyu Tolgoi underground copper and gold mine, Fitch believes. 

Standard & Poor’s said on August 19 it downgraded Mongolia’s rating by one notch to B- citing weakening fiscal and growth performance. Mongolia’s economy is now expected to grow by 1.3% in 2016, versus S&P’s previous estimate of 2.6%. “Our lower growth estimate stems partly from the ancillary effects of Mongolia's weaker terms of trade and partly from the country's mixed mining policies, which discouraged foreign direct investment,” S&P said. Another key deteriorating risk factor for Mongolia relates to its public finances, according to the ratings agency.

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