Moody's Investors Service announced on July 3 that it had adjusted the outlook on Mongolia's banking system from negative to stable. According to the ratings agency, “The outlook indicates Moody's expectation for how bank creditworthiness will evolve in the country over the next 12 to 18 months.” "Our stable outlook on Mongolia's banking system is based on the fact that the economic program between the IMF and the Government of Mongolia will lead to a less challenging operating environment for the banks," said Hyun Hee Park, a Moody's Assistant Vice President and Analyst. "In particular, the IMF's Extended Fund Facility package, together with investment in phase 2 of the Oyu Tolgoi mining project, and key commodity prices above 2016 lows will help stabilize the economy and lay the foundation for a return to growth in 2018," added Park. Moody's conclusions were contained in its recent report on Mongolian banks titled "Banking System Outlook - Mongolia, Less challenging operating environment drives stable outlook". The stable outlook is based on Moody's assessment of five drivers: Operating Environment (stable); Asset Quality and Capital (deteriorating); Funding and Liquidity (stable); Profitability and Efficiency (deteriorating); and Systemic Support (stable). Moody's baseline scenario assumes a marginal decline of 0.2 percent in real GDP growth for Mongolia in 2017, because they believe that the impact from the IMF measures will not emerge until 2018. Moody's forecasts real GDP growth of 1.8 percent in 2018. The ratings agency points out that the IMF is conducting a review on the banks' asset quality, and that when the review is completed, confidence in the accuracy of reported asset values will increase, which will result in improved access to external capital. Moody's also noted that funding and liquidity conditions of banks will improve because of capital inflows. “Specifically, the second phase of Oyu Tolgoi will add meaningful liquidity to the domestic deposit pool. Foreign-currency liquidity at the banks will continue to improve, as the banks reduce their foreign-currency loan exposures,” Moody’s stated. Improving liquidity has reduced funding costs, which, combined with a return to loan growth, will lead to an increase in interest earned on loans. However, an increase in credit costs will weigh on the banks' profits, and keep profit metrics at cyclical lows in 2017 before improving in 2018, the agency predicts. Moody's rates seven of the 14 commercial banks in Mongolia, and one government-related policy bank. These banks accounted for 90.1 percent of total system loans and 91.1 percent of total system deposits at end of 2016.