Moody’s Investors Service published its report on the medium-term prospects for growth, liquidity and fiscal strength for Mongolia. In the report, the ratings agency says that Mongolia’s GDP growth will be strong over the medium term, rising towards seven percent by 2021, backed by demand for its natural resources.

Mongolia’s medium-term growth potential is backed by its abundant mineral resources, demand for which is expected to remain solid. A recent debt refinancing has coincided with an improvement in external metrics to alleviate liquidity and external pressures, albeit from high levels. Sustained adherence to IMF rules designed to improve accountability and tighten the budgetary process would distinguish the current improvements in credit metrics from previous boom-bust cycles, said Moody’s.

However, at the current juncture and in the next few years, the ratings agency says that Mongolia’s credit metrics will remain vulnerable to commodity price cycles.

The full report, titled the “Government of Mongolia: FAQ on medium-term prospects for growth, liquidity and fiscal strength” reaches a conclusion on three main questions.

Moody’s said that its report answers the three questions below:

  1. What are Mongolia’s medium-term growth prospects?
  2. Does the recent refinancing eliminate external liquidity risks?
  3. What is the outlook for Mongolia’s fiscal metrics in light of implemented and planned reforms?

Consumption of coal and copper, both key exports for Mongolia, is likely to remain robust, given structural changes in the market, such as those associated with urbanization and the electrification of transport in China. Based on the stable market for copper and coal, Moody’s forecasts that Mongolia’s GDP growth will creep closer to the record levels that it had achieved in 2011.

In the short term, the ratings agency forecasts that GDP growth will be 3.3 percent in 2018. In 2017, Moody’s said GDP growth exceeded their expectations with 4.2 percent.

“This denotes some capacity of the economy to respond to a favorable external environment, and a greater resilience to fiscal and monetary policy tightening than we previously estimated,” Moody’s said.

Risk to the strong expectation of growth stems from a very high reliance on China as a destination for its exports and source of investment, as well as lack of predictability on the regulatory environment which can weigh on investment.

However, both liquidity risks and external vulnerability remain key constraints to the credit profile. Moody’s estimates that external debt obligations due over the next year are still around 1.5 times larger than foreign exchange reserves, underscoring the prominence of external risks.

Due to this, Moody’s says that a sustained observance to structural reforms developed under the IMF program is crucial for credit quality because these reforms are designed to prevent a return to boom-bust cycles, that Mongolia has tended to be vulnerable to in the past.

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