Fitch Ratings says IMF financing will help Mongolia’s economy find stable footing

The recent approval of Mongolia's enrollment in an extended fund facility (EFF) program will help reduce Mongolia’s external financing risks and should put the economy on more stable footing, Fitch Ratings stated in a press release on May 28.

“The IMF program will also promote sustainable fiscal policies, which could support Mongolia's credit profile over the medium term. However, there will be implementation challenges in meeting budget targets and mediumterm debt sustainability is highly dependent on the success of large mining projects,” Fitch stated.

The ratings agency believes that Mongolia’s success in refinancing the 580 million USD bond has “already demonstrated an improvement in Mongolia's access to international financial markets since a staff-level IMF agreement was reached in February”. Back in February, Fitch affirmed Mongolia’s sovereign rating at 'B-'/Stable, mostly due to the likeliness of EFF enrollment being approved.

Fitch wrote, “The support package and stronger market confidence should ensure that Mongolia can meet its external obligations over the next few years, and should support greater stability of the Mongolian tugrug, which depreciated by 20 percent against the U.S. dollar in 2016. The partial recovery in commodity prices has also relieved some pressures - commodities account for around three-quarters of Mongolia's exports and mining activity represents about 20 percent of GDP. Overall, the near-term risk of default has fallen sharply from last year.”

Mongolia's budget deficit surged to 17 percent of GDP in 2016, up from 8.5 percent in 2015, and Fitch estimates that general government debt rose sharply to around 92 percent of GDP at the end of 2016, well above limits set by the Fiscal Stability Law. The government is now targeting a budget deficit of about 10 percent in 2017 and aims to take the deficit below seven percent by 2019 under a new mid-term budget framework.

Fitch believes that Mongolia’s poor track record in hitting fiscal targets in recent years suggests there is a risk of some slippage. Nevertheless, they expect a significant reduction in the deficit over the next two years, given ongoing collaboration with the IMF and a desire to avoid a resurgence of market pressures ahead of future refinancing exercises.

The agency forecasts that the real GDP growth will pick up to eight percent by 2019, up from just one percent in 2016.