Tuesday, December 23, 2014

Fitch Affirms Mongolia at 'B+'; Outlook Remains Negative

(The following statement was released by the rating agency) HONG KONG, December 11 (Fitch) Fitch Ratings has affirmed Mongolia's Long-Term Foreign and Local Currency IDRs at 'B+'. The issue ratings on Mongolia's senior unsecured foreign and local currency bonds are affirmed at 'B+'. The Outlooks on the Long-term IDRs remain Negative. The Country Ceiling is affirmed at 'B+' and the Short-term foreign currency IDR is affirmed at 'B'. KEY RATING DRIVERS The affirmation of Mongolia's IDRs with Negative Outlooks reflects the following key rating drivers. - Unstable Policy Environment: Prolonged commercial disputes between public officials and Rio Tinto have halted progress on the USD5bn Oyu Tolgoi Phase 2 copper mining project. To counteract the resulting slowdown in economic activity, policy makers have enacted aggressive monetary and fiscal stimulus measures that have had a destabilising effect on the economy. Growth has slowed, inflation has averaged 13.1% in 2014, foreign reserves have fallen by 41% year-on-year, FDI has contracted sharply, and a further 12% depreciation of the domestic currency year-to-date has worsened banking sector asset quality. - Weak External Liquidity: Mongolia's stock of foreign reserves is low at USD1.4bn as at end-October 2014, and it has effectively been debt-funded through external bond issuance and a swap arrangement with the People's Bank of China (PBOC). Reserve coverage is weak compared to peers at 2.1 months of current account payments versus the 'B' median of 3.4 months. Fitch believes Mongolia's aggregate external liquidity resources (defined as gross foreign reserve assets plus the estimated undrawn portion of the PBOC swap line) are barely sufficient to meet liquidity requirements over the coming two years, given current trends. - Positive Political Developments: The recent appointment of a new prime minister and the formation of a "super coalition" are broadly positive political developments, which Fitch believes have increased the prospects of a favourable resolution to the Oyu Tolgoi dispute. - High Public Indebtedness: Persistent fiscal deficits and sizeable off-budget spending through the state-owned development bank will result in Mongolia's public debt rising to an estimated 59% of GDP in 2014, significantly in excess of the 'B' median of 43%. Public debt has risen by USD3.7bn since 2011, which primarily represents a sharp increase in external debt issuance by sovereign and sovereign-guaranteed entities. - Sizeable Refinancing Risk: Rising dependence on external capital markets combined with a sharp decline in foreign direct investment (FDI) have exposed Mongolia's public balance sheet to significant refinancing risks. The sovereign has sizeable maturities due in 2018 (USD500m) and 2022 (USD1bn). The Development Bank of Mongolia has additional maturities in 2017 (USD580m) and 2023 (JPY30bn) that carry an explicit sovereign guarantee. - Favourable Development Prospects: Mongolia's long-term development prospects are supported by its generous endowments of coal, copper, gold, and rare earths, which have been estimated at USD1.3trn. A small population under 3 million also suggests that per capita incomes have the potential to rise dramatically if the country is able to successfully harness its natural resource endowments. - Strong GDP Growth: Mongolia's five-year average real GDP growth of 11.2% is far stronger than the 'B' median of 3.9%. The country also scores above its peer group in many structural features, including governance indicators, savings and investment rates, and per capita incomes. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings: - Continued depletion of Mongolia's external liquidity resources. - Emergence of systemic financial stress such as a run on deposits and/or a flight out of the Mongolian tugrik into foreign currency. The main factors that individually, or collectively, could result in a revision of the Outlook to Stable include: - A favourable resolution to the Oyu Tolgoi Phase 2 dispute between Rio Tinto and the authorities is likely to provide relief to many of Mongolia's credit constraints by unlocking sizeable FDI inflows, restoring investor confidence and alleviating refinancing risks. - Credible and coherent macroeconomic policy-making that increases confidence in Mongolia's basic economic stability. KEY ASSUMPTIONS - Reported foreign reserve assets can be deployed to meet balance of payments requirements, in spite of the fact that they include holdings of non-convertible currency. - Mongolia maintains stable political and economic relations with China, its largest export destination and key provider of its international liquidity resources. Contact: Primary Analyst Andrew Fennell Associate Director +852 2263 9925 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Thomas Rookmaaker Director +852 2263 9891 Committee Chairperson Richard Fox Senior Director +44 20 3530 1444 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Sovereign Rating Criteria" dated 12 August 2014 and "Country Ceilings" dated 28 August 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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