Fitch Ratings agency has revised Mongolia’s credit rating from B- stable to B- positive in light of an improved fiscal outlook and a recovering economy backed by 5.8 percent GDP growth in the third quarter of 2017.
Fitch forecasts that the government’s deficit in 2017 will decrease to 7.3 percent of GDP. Moving forward in 2018, the ratings agency has estimated that the government will be able to decrease budget deficit to 6.5 percent of GDP in part due to increasing budget revenue and minimal budget expenditure increases.
“Continued adherence to fiscal targets and reforms aimed at curtailing off-budget expenditure and introducing greater independence to the budgeting process should lay a path towards a more robust and credible fiscal framework over time, but is still in a nascent development stage,” said Fitch in a statement.
Another factor that the agency took into account when revising Mongolia’s credit rating was the refinancing of all near-term external bond debt including the Chinggis Bond, effectively pushing back any major debts until 2020. Fitch believes that the IMF program was the underlying catalyst which helped bolster investor confidence and ultimately facilitated Mongolia’s refinancing of debt.
The ratings agency forecasts that the GDP of Mongolia will grow 4.2 percent in 2017 and 4.5 percent in 2018.
“Thanks to a surge in investment tied to the underground development of the Oyu Tolgoi copper mine and a rebound in exports and private consumption, real GDP rose by 5.8 percent in the third quarter of 2017.”
Fitch also mentioned the ongoing logjam at the Gashuunsukhait border crossing, which has caused coal exports to China to dwindle since July 2017. However, the ratings agency does not believe this will affect the outlook of Mongolia significantly.
“The customs bottleneck introduces both downside and upside risk to our forecasts, but is unlikely to derail the recovery given that coal export volumes remain well above their 2015-16 monthly average even at reduced throughput levels, and other key exports, such as copper, are only modestly impacted.”
Despite the improvements in the economy and the subsequent revision by Fitch, the agency still has concerns. Especially in regards to external finances remaining weak, even though there have been recent improvements.
Another concern brought up is Mongolia’s heavy reliance on external debt capital markets although the agency believes this reliance should remain moderate as multilateral and bilateral funding inflows increase. Mongolia’s high commodity export dependence and export concentration to China (75 percent of exports) also leave it vulnerable to external shocks, and constrain the ratings, said Fitch.
In terms of governance, Fitch mentioned Mongolia’s recent history of “sporadic leadership changes” which the agency says increases the potential for political shocks and sharp reversals in policy. Even though a parliamentary majority by the ruling Mongolian People’s Party alleviates some of the concerns, Fitch sees a more immediate risk of a stronger macro economic performance and the resurgence in external inflows causing the government’s commitment to IMF reform targets to deteriorate.
The ongoing asset quality review on the banking system will reveal the capital adequacy of the system and allow the government to intervene to fix any capital shortfalls. Mongol Bank will start its supervisory review in December by applying its own two-year stress testing on individual banks and engaging with them to identify and rectify any potential capital shortfalls.
IMF has estimated bank capital needs could amount to seven percent of GDP from which up to 3.5 percent of GDP has been earmarked from public funds as a contingency. While the deployment of public funds for banking-sector recapitalization would be a potential set-back to recent fiscal improvements, Fitch does not believe the estimated amount would pose a material funding constraint to the sovereign, nor is it sufficient in size to offset other positive developments across Mongolia’s sovereign credit profile.
Structural factors such as GDP per capita, governance indicators and doing business rankings score above “B” category peers and provide continued support to the rating.
“Mongolia’s small population of roughly three million also suggests per capita incomes have the potential to rise dramatically over the longer term if the country can successfully harness its general natural resources endowments through strategic projects such as Oyu Tolgoi and Tavan Tolgoi, and deliver them more reliably via planned rail and other infrastructure connectivity enhancements,” Fitch concluded.