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Dec 13 (The following statement was released by the rating agency)
Fitch Ratings has revised the Outlooks on
Mongolia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs)
to Negative from Stable and affirmed the IDRs at 'B+'. The Country Ceiling is
affirmed at 'B+' and the Short-Term Foreign-Currency IDR at 'B'. The issue
ratings on Mongolia's senior unsecured foreign- and local-currency bonds are
also affirmed at 'B+'.
KEY RATING DRIVERS
The revision of the Outlook to Mongolia's IDRs to Negative from Stable reflects
the following key rating drivers:-
- Macroeconomic policy settings are highly expansionary and Fitch believes this
poses a growing threat to Mongolia's economic and financial stability. Fitch
estimates Mongolia's government deficit at 12% of GDP in 2013, after taking into
account off-budget spending, although the deficit could be smaller depending on
the rate of spending towards the end of the year. This has rendered the
country's Fiscal Stability Law ineffective as a constraint on policy-making.
Bank of Mongolia (BoM) has significantly loosened monetary conditions, fuelling
credit growth of 53% in the year to October 2013. Inflation was 10% yoy in
October, despite a special BoM-funded price-stabilisation scheme.
- Gross government debt is projected at about 50% of GDP at end-2013, against a
median of 40% for sovereigns rated in the 'B' category (those rated 'B-', 'B'
and 'B+') and the median of 36.4% for the 'BB' category. The Mongolian
sovereign's government debt is mainly foreign-currency denominated. The
sovereign and a public sector entity, the Development Bank (DBM), have borrowed
heavily in international debt capital markets since March 2012, to the tune of
USD2,080m or 18% of 2013 GDP. Fitch expects DBM to issue a further USD300m of
debt imminently. There is marketable debt maturing in 2017 (USD580m from DBM),
2018 (USD500m) and 2022 (USD1,000m).
- The external finances are weak and deteriorating. The current account balance
plus net foreign direct investment (FDI) flows will swing to a projected deficit
of 11% in 2013 from a 9.7% surplus in 2012. FDI is estimated to halve in US
dollar terms to about USD2.2bn in 2013. Fitch projects net external debt at
USD13.5bn or 119% of GDP at end-2013, up from 96% at end-2012 and 70% at
end-2011 (although about USD10.2bn of external debt takes the form of
intercompany lending, which is likely to be stable).
- External liquidity is weak and projected to deteriorate further. Official
foreign reserves are projected at USD2.5bn or 3.1 months of current external
payments (CXP) by end-2013, below the medians for 'B' and 'BB' category
sovereigns of 3.4 months and 4.4 months respectively. Fitch projects Mongolia's
reserves will decline to two months of CXP by 2015 compared with the 'B'
category median of around 3.1 months.
- Non-performing loans (NPLs) in the banking system grew 83% in the year to
October, outpacing the 53% in credit growth, and taking the NPL/total loan ratio
up to 5.3% from 3.7% in June. Government subsidies for mortgages are fuelling
house prices, which were up 32% yoy in 3Q13. The 24% depreciation of the
Mongolian currency, the tugrik, in the year to date may strain the ability of
borrowers to repay the 30% of loans denominated in foreign currency. Savings
Bank, the country's fifth-biggest, was declared insolvent in July 2013 after a
related entity defaulted on a large exposure.
- Counterbalancing these factors is Mongolia's five-year average real GDP growth
of 9.3%, which is far stronger than the 'B' rating category median of 4.1% or
the 'BB' median of 3.6%. Some credit fundamentals including the standard of
governance and the business climate (as measured by the World Bank's Ease of
Doing Business framework) exceed 'B' medians. The country's long-term prospects
are bright, underpinned by a generous endowment of natural resources, including
coal, copper, gold and rare earths. However, development of its endowment has
largely stalled amid disagreements between developers and the authorities.
Resolution of these issues could unlock large FDI inflows in 2014. A reform of
the Investment Law that took effect on 1 November 2013 may help bring in FDI.
The Negative Outlook reflects the following risk factors that may, individually
or collectively, result in a downgrade:
- Further deterioration of Mongolia's external finances - such as a further rise
in net external indebtedness, or sustained declines in international reserves.
- A continuation of loose macroeconomic policy settings that leads to an
intensification of risks to basic economic and financial stability via pressure
on inflation, the trade deficit, bank balance sheets, and the currency.
- Emergence of systemic financial stress such as a run on deposits, a further
sharp rise in NPLs, and/or a flight out of the tugrik into foreign currency.
- A further marked increase in sovereign and quasi-sovereign external borrowing
that calls into question fundamental foreign-currency solvency.
- A sharp and sustained drop in prices for Mongolia's main commodity exports, in
particular copper and coal
The current Outlook is Negative. Consequently, Fitch's sensitivity analysis does
not currently anticipate developments with a material likelihood, individually
or collectively, of leading to an upgrade. However, future developments that
may, individually or collectively, lead to a revision of the Outlook to Stable
- Progress in resolving policy, financial and regulatory hurdles to the
development of Mongolia's natural resource endowment, in particular the large
Oyu Tolgoi copper and gold mine, that unlocks substantial FDI inflows above
Fitch's expectation of USD2bn in 2014.
- Credible and coherent macroeconomic policy-making that increases confidence in
Mongolia's basic economic stability.
- Strengthening of Mongolia's buffers against commodity-price volatility, for
example through a sustained increase in official reserves, a reduction in the
budget deficit in line with the Fiscal Stability Law, and structural budgetary
reform to bring spending on budget.
Fitch assumes that Mongolia's key trade and investment partner China does not
experience a severe, disruptive slowdown in its growth.
Fitch assumes Mongolia remains basically politically stable and continues to
solicit foreign direct investment, and does not resort wholesale to
business-unfriendly practices such as expropriation of assets.