Fitch upgrades Mongolia to 'B'

2018-07-10 13:45:44
Ulaanbaatar /MONTSAME/ On July 9, the Fitch Ratings has upgraded Mongolia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B' from 'B-'. The Outlook is Stable. The upgrade of Mongolia's IDR reflects ongoing improvements to fiscal and external metrics and progress in meeting key IMF programme targets. 

Fiscal metrics have continued to improve since November 2017 when the agency revised the Outlook to Positive from Stable. General government revenue through May 2018 rose by 26 percent, due to stronger than budgeted tax receipts associated with robust customs activity and the broader economic recovery. At the same time, expenditure rose by 6 percent, broadly in line with the 2018 budget target. As a result, Fitch now forecasts a 2018 general government deficit of 3.9 percent of GDP, below the authorities' approved budget target of 5.9 percent, and consistent with the gross general government debt (GGGD)/GDP ratio remaining on a downward trajectory.

Fitch forecasts GGGD will decline to 75.3 percent of GDP by the end of 2018, down from 81.2 percent in 2017, and well below its 2016 peak of 91.4 percent following a commodity-price shock, sharp rise in expenditure, and large currency depreciation. The agency's baseline forecasts suggest GGGD will fall to about 70 percent of GDP by end-2020, assuming average nominal GDP growth of 12.7 percent, a budget deficit of 4 percent, and broad stability of the exchange rate. Nevertheless, this scenario will still leave Mongolia's GGGD/GDP ratio well above the current 'B' median of 62 percent. 

The IMF Executive Board completed its fourth review of Mongolia's three-year Extended Fund Facility in June 2018, citing strong performance under the programme and that all quantitative targets had been met as of end-March 2018. This will enable an additional disbursement of IMF funds and provide a supportive backdrop for other external donors to approve further disbursements under their respective arrangements that together form Mongolia's IMF-led USD 5.5 billion external financing package, initiated in mid-2017.

External buffers have strengthened. Foreign reserves rose to USD 3.3 billion by end-May 2018, up from about USD 1 billion in early 2017, supported by donor inflows tied to the IMF programme. Fitch forecasts foreign reserve coverage will rise to 4.5x current-external payments by end-2018, up from 2.3x at end-2016, to exceed the 'B' median of 3.9x. The agency expects the current account deficit to widen further this year, but more than half of the increase will reflect a rise in capital goods imports tied to the Oyu Tolgoi copper mining project, which is funded via FDI. 

The growth outlook remains favorable. Real GDP growth accelerated to 6.1 percent in 2018, up from 5.2 percent in 2017, due to rising consumption and a surge in mining-related investment. Export volumes of coal and copper rebounded following an official visit of Mongolian Prime Minister U.Khurelsukh to China in April 2018, which appears to have resolved a customs dispute at the Chinese border that crippled the passage of cargo vehicles last winter. Fitch forecasts real GDP growth of 5.2 percent in 2018 and 6.3 percent in 2019, which balances our expectation of continued strength in private consumption and investment, with a large drag from net exports owing to a sharp rise in consumer and capital goods imports since early 2018.