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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 2016.
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 management.
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 boost.