Moody’s Investors Service has downgraded Mongolia’s long-term issuer and senior unsecured ratings from B3 to Caa1 due to “heightened uncertainty” regarding the government’s ability to meet it’s direct and indirect debt service obligations over the next two years and to shore up external liquidity.

Moody’s stated, “Moody’s expectation that the budget deficit will remain wider for longer than previously expected, which combined with a weaker growth outlook in the coming two years, will raise the government’s debt burden to elevated levels.”

This comes at a time when the debt obligations of the country have reached 800 million USD, 7.5 percent of the GDP projected in 2017. Development Bank of Mongolia LLC will start paying 580 million USD in March 2017. Refinancing these debt obligations would only add to the government’s already high reliance on market debt, in an environment in which demand for its debt has fallen and interest costs have risen.

Moody’s stated that the sustainability of the country’s external payments position will depend on whether or not the government can receive funding and loans from international organizations such as the IMF and countries such as China. The report highlighted that it was not clear if the government would be able to secure the funding required to overcome its debt pressures.

According to their report, “Based on the government’s supplementary budget for 2016, we now expect the budget deficit will reach 19.5 percent of GDP from just five percent of GDP in 2015, the largest in Moody’s sovereign rating universe.”

Moody’s projects that the steep fiscal deficit in 2016 will take many years to reverse, even though the government has committed to fiscal consolidation and has implemented a detailed economic stabilization plan. “With limited room to cut spending or generate revenues until mining production and exports significantly ramp up, deficits will remain in double digits in 2017 and 2018,” the report highlighted.

The Ministry of Finance and Mongol Bank have responded to the downgrade, stating, “The downgrade is not reflective of the current situation.”