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July 2 (The following statement was released by the rating agency)
Incumbent Tsakhia Elbegdorj's victory in last
week's Mongolian presidential election creates space for the authorities to
reduce policy uncertainty, particularly around foreign investment in mining and
macroeconomic management, Fitch Ratings says. This could potentially result in
higher growth and improved fiscal performance and external finances, which would
support Mongolia's sovereign credit profile.
Elbegdorj's victory should consolidate the hold on power by the Democratic
Party, the largest member of the coalition government. Elbegdorj received
slightly more than 50% of the vote, avoiding a run-off vote. DP members will now
hold all major political posts ahead of the next parliamentary elections in
A period of political stability could allow the Mongolian authorities to clarify
their plans for the country's mining regime through a new mining law, and its
foreign investment regime through amendments to existing laws. These key policy
areas have been subject to some uncertainty in recent months, against a backdrop
of populist pressure to reassert Mongolian ownership of resource assets,
especially since last year's parliamentary elections.
When we affirmed Mongolia's 'B+' rating and Stable Outlook in November 2012, we
said a strengthened policy framework would support the sovereign credit profile.
Since then, some credit negative policy uncertainty has emerged. The biggest and
most visible example has been the delay of copper exports from the huge Oyu
Tolgoi mine jointly owned by the Mongolian government and Rio Tinto Group beyond
their scheduled start date in mid-June. This has come as Rio Tinto and the
government attempt to resolve various disputes about cost overruns and mine
Mongolia's fiscal deficit deteriorated sharply from 4.8% of GDP in 2011 to 8.4%
in 2012, as revenue intake fell short of expectations and was far outpaced by
expenditure growth (despite capex being under-executed). The government's
ability to comply with the fiscal discipline enshrined in the Financial
Stability Law, which caps the structural deficit at 2% of GDP and limits
expenditure growth from this year, will be severely tested as the law implies
significant tightening of spending.
The Bank of Mongolia has cut its policy rate and credit growth has begun
accelerating again, reaching 34.4% in May, from 23.9% in December. This has
contributed to market pressure on the tugrik, which has depreciated by 3.7% so
far this year against the US dollar.
Resolving uncertainty in these areas could prove credit positive by alleviating
investors' concern and sparking renewed FDI inflows, which would bolster
Mongolia's ability to capitalise economically on its natural resources and
lessen the pressure that lower commodity prices and falling FDI have put on the
balance of payments.
We would expect an improvement in the balance of payments once the Oyu Tolgoi
mine comes on stream, while further unexpected delays could intensify pressure
on Mongolia's external finances. FDI inflows for the second phase of the project
would help fund the current account deficit in 2013. The sovereign's fiscal
position, which is heavily reliant on mineral revenue, would also get a timely