S&P affirms ‘B’ rating for Mongolia

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S&P Global Ratings has affirmed its “B” long-term sovereign credit rating on Mongolia, as well as its “B” short-term credit rating on the sovereign.

The outlook on the long-term rating is stable and the international rating agency’s transfer and convertibility assessment on Mongolia remains unchanged at “B+”.

The stable outlook balances S&P’s expectation that Mongolia’s strong macroeconomic outlook fuels continued, yet gradual, improvement in its external and debt settings over the next 12 months, while the government continues to pursue prudent economic and fiscal policies.

Upside pressure on the rating could build if the economy outperforms the current projections over the next 12 months such that fiscal, debt, or external metrics improve more rapidly than the agency expects, according to the report.

“Downward pressure could emerge if Mongolia’s macroeconomic settings weaken, potentially owing to an unexpected acute downturn in commodities markets, such that we assess external and debt pressures to have materially deteriorated,” warned S&P. “Likewise, a backslide in the government’s fiscal consolidation program, potentially associated with rising political uncertainty around general elections in 2020, could also lead to downward pressure on the rating.”

Mongolia’s ratings reflect the country’s evolving institutional settings and elevated external imbalances, which S&P weighs against ongoing improvements to its fiscal metrics and sound economic growth prospects.

“Following a period of extremely high fiscal deficits, the Mongolian government is likely to achieve its second straight year of fiscal surpluses in 2019, and we believe that deficits over 2020-2022 are likely to be modest. Nevertheless, Mongolia continues to face signifi­­cant vulnerabilities stemming from elevated external and public indebtedness,” the agency said.

Institutional and economic profile: Sound economic growth continues to support improving credit metrics

  • Mongolia’s economy is likely to achieve its third straight year with real GDP growth above five percent this year, largely powered by strong mineral export growth.
  • S&P expects this trend to continue over the next three years, providing further support for key credit metrics.
  • The Mongolian economy remains highly vulnerable to inherently unpredictable shifts in commodity prices, as well as political risk.

Flexibility and performance profile: Mongolia still bears external vulnerabilities, even as fiscal performance improves

  • Mongolia’s credit worthiness remains constrained by elevated public and external indebtedness.
  • While these metrics should continue to improve in line with Mongolia’s robust economic performance, its external vulnerabilities will likely remain elevated for some time.
  • The government’s debt stock should decline further as long as the recent trend of fiscal prudence is maintained following the elections in 2020.

S&P underlined that revision for the Oyu Tolgoi investment agreement could undermine foreign investment climate.

On November 21 this year, Parliament approved a resolution, allowing the government to reopen negotiations with Rio Tinto on the nature of various existing agreements governing the investment, financing, and shareholder terms of the enormous Oyu Tolgoi copper and gold mine in the Gobi Desert.

“The outcome of these negotiations remains uncertain, but major revisions to the terms of the agreement could undermine the foreign investment climate in Mongolia and potentially challenge the development of the project itself. On the other hand, minor revisions, which appear to be the more probable outcome, are unlikely to materially undermine the viability of the project, and could establish a slightly more favorable financial outcome for the government,” the agency said.

Dulguun Bayarsaikhan