Fitch affirms Mongolia at 'B'; Outlook Stable

2019-07-17 14:27:55

Ulaanbaatar /MONTSAME/ On July 4, Fitch Ratings has affirmed Mongolia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook. 

Mongolia's ratings are supported by the country's robust growth outlook, improving fiscal metrics, and strong governance indicators. The ratings are constrained by Mongolia's narrow economic base, low external buffers, and a volatile political landscape, which can lead to sharp changes in economic policy and increases the likelihood of economic shocks.

The budget surplus was recorded at 2.6 percent of GDP in 2018, well above both the approved budget and Fitch's prior expectations. Budget outturns through end-May 2019 point to robust revenue and expenditure growth, even in the absence of new revenue-enhancing measures, which Fitch believes are consistent with the budget remaining broadly in balance in 2019. The prospect for continued fiscal outperformance into next year is considerably less certain amid a recent history of sharp increases in spending ahead of parliamentary elections, which are due to be held in mid-2020. Fitch forecasts the fiscal deficit to widen to 4 percent in 2020, above the authorities' projection of 2 percent, though we think there may be greater downside risks to the forecast owing to the political cycle. 

Strong budget outturns combined with a robust economic recovery that started in early 2017 have led to a sharp decline in gross general government debt (GGGD). Fitch forecasts GGGD will fall to 60 percent of GDP by end-2019 from 70 percent a year earlier, below a peak of 93 percent in 2016. The agency's baseline forecasts continue to point to a gradual downward path for Mongolia's public debt dynamics post-2020, but our assumption for higher fiscal deficits implies GGGD will remain above the historical 'B' median of 49 percent for the foreseeable future. 

The IMF has yet to conclude its sixth review of Mongolia's three-year Extended Fund Facility since late-2018 due to the outstanding completion of two prior actions pertaining to the asset quality review (AQR) of the financial sector. The IMF Article IV end-of-mission press release in June 2019 highlighted Mongolia's progress in strengthening its economic resilience, while underscoring the country's still insufficient buffers to withstand future external shocks.

External buffers have continued to strengthen, despite the delay of some IMF programme-linked disbursements. Foreign reserves were USD3.7 billion by end-May 2019, up from USD3.3 billion a year prior, and more than triple their value in early 2017. Fitch estimates foreign reserves are now equivalent to roughly 4.4x current-external payments, which puts Mongolia ahead of the 'B' median of 3.8x, and roughly on par with the 'BB' median of 4.3x, though a considerable proportion of outstanding reserves could be viewed as encumbered due to a CNY15 billion (USD2.1 billion) swap arrangement with the People's Bank of China. 

Real GDP growth accelerated to 8.6 percent in 1Q19 from 6.7 percent in 2018. The strong growth performance has been in large part due to capital expenditure linked to the ongoing development of the underground phase of the Oyu Tolgoi copper mine, for which sustainable first production has been delayed until late 2021 or 2022. Fitch forecasts GDP growth of 7 percent in 2019 and 6 percent in 2020, broadly in line with the authorities' Medium Term Fiscal Framework assumptions, and considerably above the 'B' median of 3 percent.