Monday, May 26, 2014

Moody's affirms Mongolia's B1 sovereign rating, changes outlook to negative

Singapore, May 26, 2014 -- Moody's Investors Service has changed the outlook on Mongolia's government bond rating to negative from stable. Concurrently, Moody's has affirmed the government's issuer and bond B1 ratings,the government's senior unsecured MTN rating at (P)B1 and the issuer's short-term Not Prime isuer rating. In a related rating action, Moody's has changed the outlook on the rating of the government-owned Development Bank of Mongolia LLC (DBM) to negative from stable, and affirmed DBM's senior unsecured B1 rating and its senior unsecured MTN (P)B1 rating. Since DBM's payment obligations carry a credit guarantee of the government of Mongolia, its debt obligations justify a rating at the same level as the government of Mongolia.

Mongolia's long-term local currency country risk ceiling is affirmed at Ba3, while the long-term foreign currency bond and bank deposit ceilings are affirmed at Ba3 and B2, respectively. The foreign currency short-term debt and deposit ceilings are affirmed at Not Prime. These ceilings act as a cap on ratings that can be assigned to the foreign and local currency obligations of entities domiciled in the country.

RATINGS RATIONALE

RATIONALE FOR CHANGING THE RATING OUTLOOK TO NEGATIVE

Moody's decision to change Mongolia's outlook to negative is driven by a rise in the external debt burden over recent years, a sharp fall in foreign exchange reserves, and escalating credit growth since 2013. These developments increase the possibility of a currency or external payments crisis over the next few years. At the same time, elevated inflation and rapid credit growth threaten banking system stability, and could have negative feedback effects on the balance of payments. Unpredictability in Mongolia's investment regime further exacerbates risks to the external position and to government finances, which are highly reliant on mining revenues.

First driver -- A build-up in the external debt burden

In absolute terms, external debt has nearly doubled over the last two years to $18.9 billion in 2013. At 156.8% of GDP, this is significantly above the median for country peers rated B1 to B3. As a share of current account receipts, the increase is even steeper, rising to 352.0% in 2013 from 162.2% in 2011, again above the peer median. Dependence on market funding has also risen in recent years with the issuance of global bonds and a sharp decline in concessional external borrowing. Overall domestic public debt has ratcheted up since 2009. Given that foreign currency-denominated borrowing accounts for a very significant portion of total general government debt, a potentially weakening currency will further increase Mongolia's repayment burden.

The Bank of Mongolia's expansionary monetary policy stance -- accompanied by off-budget spending and investment that circumvents fiscal responsibility legislation -- has resulted in an uptick in external and domestic government liabilities. An equally sharp build-up in private-sector external debt has largely been driven by investment-related intercompany lending.

Second driver -- Heightened strains on the external liquidity position

Strain in the external liquidity position has become increasingly evident over the past year with the decline in gross international reserves to $2.4 billion as of January 2014, from $4.1 billion in December 2012.

Pressures in the balance of payments are evident in both the current and capital accounts. Weak global commodity prices and muted demand from China have resulted in subdued export growth. While this has been accompanied by a contraction in imports so far, expansionary policies are fueling demand pressures that could result in a rise in import growth in the future. Concurrently, FDI inflows have seen a sharp deceleration, due to the completion of the first phase of the Oyu Tolgoi mining project and an uncertain investment policy.

Continued monetary expansion would add to inflationary pressures, increasing the risk of capital flight, and further weaken the external payments position. It would also exacerbate budgetary debt financing costs.

Third driver -- Rapid credit growth

Loose monetary policies pursued by the central bank since 2013 have fueled rapid credit growth, which will cross our definitional threshold for a credit boom if this year's pace matches the 104.9% average increase seen in 2013. This could undermine asset quality and pose substantial systemic risks, given difficulties for banks in fully pricing in borrowers' credit risks due to loan rate caps, concentrated lending to the real estate sector, and the possibility that refinancing will become a challenge once expansionary policy is withdrawn.

RATIONALE FOR AFFIRMING THE B1 GOVERNMENT BOND RATING

The affirmation of Mongolia's B1 sovereign rating reflects the fact that although external liquidity is strained, a balance of payments crisis does not appear imminent, since there are no significant maturing debt obligations this year and the first large sovereign bond repayment is not due until 2017.

In addition, a gradual phase-out of monetary stimulus measures has begun. This may help dampen demand pressures, although with a lag.

WHAT COULD CHANGE THE RATING -- UP/DOWN

Key factors that could prompt an upward movement in the outlook and eventually in the rating include: (1) greater price and exchange rate stability; (2) a replenishment of official foreign exchange reserves; (3) a track record of adherence to fiscal rules; (4) steady mineral resource development under a stable and predictable investment regime that would improve the country's long-term fiscal and economic prospects.

Triggers for a downward movement in the rating include: (1) a continued rapid rise in external debt or decline in official international reserves; (2) the endurance of high loan growth and inflationary pressures; (3) persistent off-budget fiscal spending and slippage in adherence to fiscal responsibility legislation; (4) setbacks to foreign direct investment in Mongolia.

GDP per capita (PPP basis, US$): 5,885 (2013 Actual) (also known as Per Capita Income)&Real GDP growth (% change): 11.7% (2013 Actual) (also known as GDP Growth)&Inflation Rate (CPI, % change Dec/Dec): 12.3% (2013 Actual) &Gen. Gov. Financial Balance/GDP: -1.4% (2013 Actual) (also known as Fiscal Balance)&Current Account Balance/GDP: -26.5% (2013 Actual) (also known as External Balance)&External debt/GDP: 156.8% (2013 Actual) &Level of economic development: Low level of economic resilience &Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 21 May 2014, a rating committee was called to discuss the rating of the Mongolia, Government of. Views raised included: The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Anushka Shah
Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

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