(The following statement was released by the rating agency) HONG KONG/SINGAPORE, July 08 (Fitch) Recently released Mongolian foreign-reserves data confirm that economic and financial stability is under pressure, says Fitch Ratings. Mongolia has largely failed to build adequate fiscal and external buffers against commodity price volatility to which its economy is becoming increasingly exposed. Exceptionally loose fiscal and monetary policy amid a challenging external environment is exacerbating external accounts which are already weak, and adding to financial risks. Mongolian central bank data through to end-May 2014 show gross foreign reserves falling by 27% to USD1.6bn, from USD2.2bn at end-2013. As a result, reserves now provide only 1.8 months of external payment coverage, well below the 'B' range median of 3.2 months. It is also likely that the headline figure is being bolstered by foreign drawings under swap arrangements with other central banks. According to the Bank of Mongolia's latest statistical bulletin, "foreign liabilities" stood at USD960m, which suggests that net reserves could be as low as USD540m. The Bank of Mongolia announced on 7 July that it has agreed with the People's Bank of China to extend its CNY10bn (USD1.6bn) swap facility for a further three years, and that discussions are in progress for a possible doubling of the arrangement. The renminbi swap is a meaningful source of external liquidity support - even though the renminbi is not a convertible currency - because Mongolia sources about 30% of its imports from China. However, the swap offers only short-term liquidity support, and does not address the underlying drivers of deterioration in Mongolia's economic performance and credit profile.
Economic policy has been highly expansionary since key commodity export prices begun to fall amid a general slowdown in China. The World Bank estimates the public sector deficit to have come in at 10.9% of GDP in 2013 owing to off-budget spending, despite a Fiscal Stability Law which is supposed to limit deficits to 2% of GDP. Monetary policy has also been extremely loose, with the Bank of Mongolia cutting its policy rate by 275bp since end-2012 while increasing funding to the banking system by MNT3trn (17% of GDP).