Moody’s raises Mongolia’s long-term issuer and senior unsecured ratings to ‘B3’ with stable outlooks

By bne IntelliNews January 19, 2018

Moody's Investors Service on January 18 raised Mongolia's long-term issuer ratings and senior unsecured ratings from Caa1 to B3 with stable outlooks.

The rating agency cited easing external pressures and liquidity in the country for its decion to raise the ratings. Mongolia’s economy was hit in 2016 by low commodities prices and high government spending, resulting in only 1% growth that year. However, the country’s economy is heading towards recovery - Mongolia recorded 4.5% growth in the first nine months of 2017 partly on the back of rising demand for Mongolian coal in China and partly due to the $5.5bn International Monetary Fund-led (IMF) bailout deal.

“GDP growth surprised on the upside in 2017. Moody's now estimates that GDP increased by 4.2% in 2017 and [will grow by] 3.3% in 2018,” the statement said. “This denotes some capacity of the economy to respond to a favorable external environment, and a greater resilience to fiscal and monetary policy tightening than we previously estimated.”

The refinancing of Mongolia’s government debt at end-2017, measures put in place to narrow the country’s fiscal deficit and high commodity revenues have eased its financing needs, Moody's said.

While measures currently implemented under the IMF deal will contribute to lower volatility in economic and fiscal outcomes due to potential commodity price swings, the deal will not remove such risks entirely, the agency noted. The measures include higher tax rates and cuts to social welfare.

The Mongolian government is attempting to diversify the country’s economy away from commodities exports, hoping to develop other sectors such as tourism, but such an initiative will take years before Mongolia can start protecting itself from commodities price crashes.

“While progress has been made in setting up the regulatory and legal framework, adherence to the current reform plans over a sustained period of time would distinguish the current improvements in headline economic and fiscal metrics from previous cycles,” the agency posited. “Indeed, past experience indicates that in an adverse commodity price environment, previously implemented rules have been relaxed or circumvented, resulting in a reversion to boom-bust cycles.”

The ratings will go down in the event of emerging “signs that reform progress slows or seems ineffective at reducing the volatility of Mongolia's credit metrics as credit negative”. Moody’s will improve the ratings further in the event “of sustained and effective implementation of structural reforms leading to greater confidence that, even in an adverse commodity price environment, macroeconomic volatility and fiscal pro-cyclicality would be reduced”.

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