Fitch affirms Mongolia at 'B+'/stable
Nov 22- Fitch Ratings has today affirmed Mongolia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+' with Stable Outlook. The agency has also affirmed its Short-Term IDR at 'B' and Country Ceiling at 'B+'.
"Mongolia's economy is set to expand rapidly as the mineral sector develops, but a stronger policy framework is needed to manage the boom," said Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch. "The economy currently risks overheating amid rapid growth in bank lending and government spending."
Mongolia emerged from its International Monetary Fund (IMF) programme with a new fiscal policy framework including a Stabilisation Fund (SF) for saving excess mineral-derived revenues starting 2011, and a medium-term budget framework (MTBF) setting out a path for the structural deficit (adjusted for commodities prices) to 2013. But savings in the SF have been negligible (just MNT65.7bn by October 2011, 0.6% of 2011 GDP), while a revision to the 2011 budget essentially spent a revenue overshoot, against the spirit of the MTBF. Strong growth in entitlement spending in 2011 that would be hard to unwind leaves the budget exposed to future commodity-price volatility. However, the moderate level of government debt - expected at just 25% of GDP by end-2011 - supports the ratings.
Real GDP grew 20.8% in Q311 yoy, up from 17.3% in Q211. Fitch projects a 17% growth for the year. Foreign direct investment (FDI), overwhelmingly into the mining sector, totalled USD2.7bn or about 32% of GDP in just the first nine months of the year. But the boom has other drivers beyond mining: government spending was up 43% in October 2011 (year-to-date, yoy) while credit grew 79% in the year to October. House prices rose a rapid 17% yoy in September 2011. Bank supervision remains an area of concern, with the IMF raising concerns over the practice of supervisory forbearance and the robustness of supervision. Inflation rose to 10% in September 2011, above the 12-month average of 9%.
The economy's external liquidity position has strengthened with official reserves rising to USD2.6bn by end-September, up 14.4% year-to-date. The current account deficit is projected at 26% of GDP for 2011, but is funded by FDI inflows. Following repayment of a USD75m bond in 2010, sovereign external debt is entirely from multilateral and bilateral official creditors. The average interest rate on the external debt was around 1% in 2010. The sovereign became a net external creditor to the tune of around 4% of GDP in 2010, a position sustained in 2011.
Mongolia's core public institutions and quality of governance are a relative strength in the 'B' range, although maintaining these strengths once mineral revenues start flowing strongly will be crucial. Per capita income of USD3,100 in 2011 is near the 'B' range median but below the 'BB' median of USD3,700.
Mongolia's longer-term prospects are bright, but managing the resources-led boom will be challenging. Building fiscal buffers against commodity price volatility would be positive for the ratings, although progress on this around elections for parliament in 2012 and the presidency in 2013 will likely be slow. Completing banking sector reform and strengthening bank supervision could reduce risks of further banking crises and would support the ratings.
"Mongolia's economy is set to expand rapidly as the mineral sector develops, but a stronger policy framework is needed to manage the boom," said Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch. "The economy currently risks overheating amid rapid growth in bank lending and government spending."
Mongolia emerged from its International Monetary Fund (IMF) programme with a new fiscal policy framework including a Stabilisation Fund (SF) for saving excess mineral-derived revenues starting 2011, and a medium-term budget framework (MTBF) setting out a path for the structural deficit (adjusted for commodities prices) to 2013. But savings in the SF have been negligible (just MNT65.7bn by October 2011, 0.6% of 2011 GDP), while a revision to the 2011 budget essentially spent a revenue overshoot, against the spirit of the MTBF. Strong growth in entitlement spending in 2011 that would be hard to unwind leaves the budget exposed to future commodity-price volatility. However, the moderate level of government debt - expected at just 25% of GDP by end-2011 - supports the ratings.
Real GDP grew 20.8% in Q311 yoy, up from 17.3% in Q211. Fitch projects a 17% growth for the year. Foreign direct investment (FDI), overwhelmingly into the mining sector, totalled USD2.7bn or about 32% of GDP in just the first nine months of the year. But the boom has other drivers beyond mining: government spending was up 43% in October 2011 (year-to-date, yoy) while credit grew 79% in the year to October. House prices rose a rapid 17% yoy in September 2011. Bank supervision remains an area of concern, with the IMF raising concerns over the practice of supervisory forbearance and the robustness of supervision. Inflation rose to 10% in September 2011, above the 12-month average of 9%.
The economy's external liquidity position has strengthened with official reserves rising to USD2.6bn by end-September, up 14.4% year-to-date. The current account deficit is projected at 26% of GDP for 2011, but is funded by FDI inflows. Following repayment of a USD75m bond in 2010, sovereign external debt is entirely from multilateral and bilateral official creditors. The average interest rate on the external debt was around 1% in 2010. The sovereign became a net external creditor to the tune of around 4% of GDP in 2010, a position sustained in 2011.
Mongolia's core public institutions and quality of governance are a relative strength in the 'B' range, although maintaining these strengths once mineral revenues start flowing strongly will be crucial. Per capita income of USD3,100 in 2011 is near the 'B' range median but below the 'BB' median of USD3,700.
Mongolia's longer-term prospects are bright, but managing the resources-led boom will be challenging. Building fiscal buffers against commodity price volatility would be positive for the ratings, although progress on this around elections for parliament in 2012 and the presidency in 2013 will likely be slow. Completing banking sector reform and strengthening bank supervision could reduce risks of further banking crises and would support the ratings.
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