Rating agencies optimistic on Mongolia
Credit ratings agencies, namely the Big Three -- Standard & Poor’s (S&P), Moody’s, and Fitch Group -- have been increasingly optimistic about Mongolia’s outlook. In the latest ratings update, S&P upgraded the Mongolian sovereign credit rating to “B” from “B-” with a stable outlook...
Credit ratings agencies, namely the Big Three -- Standard & Poor's (S&P), Moody's, and Fitch Group -- have been increasingly optimistic about Mongolia’s outlook. In the latest ratings update, S&P upgraded the Mongolian sovereign credit rating to "B" from "B-" with a stable outlook.
The update reflects the government's strong fiscal performance thanks to the combination of higher commodity prices in global market and stricter spending controls, S&P said in a statement.
Fitch and Moody’s, the two other major agencies, have upgraded the country’s credit rating to stable this year. GDP growth has been averaging above six percent with 6.3 percent in the first half. As GDP growth has increased from 1.2 percent in 2016 to exceeding six percent, credit ratings agencies have had more of an optimistic outlook for the economy.
Concurrently, the extended fund facility, being implemented with the International Monetary Fund (IMF) has had a strong effect on maintaining confidence in the economy both by credit agencies and subsequently, investors.
Recently, Moody’s said that the credit profile of Mongolia at B3 stable balances the country’s still-high external and liquidity risks, against its strong medium-term growth prospects from the extraction of plentiful natural resources.
“Mongolia's performance under a three-year Extended Fund Facility program with IMF, which was embarked on last year, has been creditable, with the government surpassing most quantitative targets set under the original agreement, particularly with fiscal metrics,” Moody’s underlined.
Moody's conclusions are contained in its just-released annual credit analysis, "Government of Mongolia -- B3 stable". This analysis elaborates on Mongolia's credit profile in terms of economic strength, Low (+); institutional strength, Low (-); fiscal strength, Very Low (-); and susceptibility to event risk, High (-), which are the four main analytic factors in Moody's Sovereign Bond Rating methodology.
The stable outlook indicates that risks to Mongolia's rating are balanced. Reforms could prove more effective at reducing Mongolia's sensitivity to commodity cycles than Moody's currently envisages, and both fiscal and external buffers could improve.
However, implementation risk to program goals could stem primarily from domestic political risks and commodity price fluctuations, both of which have diminished the effectiveness of reforms in the past, the agency said.
Another concern was that since reforms have been implemented during a time of favorable commodity prices and demand, there remains a risk of slippage to pro-cyclical behavior in an adverse commodity scenario.
Ultimately, adherence to the current reform plans over a longer period of time will distinguish the current improvements in headline economic and fiscal metrics from previous cycles, Moody’s said.
Meanwhile, Moody’s affirmed the rating of Development Bank of Mongolia LLC's (DBM) at B3 foreign currency long-term issuer rating with a stable outlook. In terms of an upgrade, Moody’s upgraded the DBM’s Baseline Credit Assessment (BCA) and Adjusted BCA to b3 from caa1, foreign currency and local currency long-term Counterparty Risk Ratings to B2 from B3, and longterm Counterparty Risk Assessment to B2(cr) from B3(cr).
The upgrade of DBM's BCA reflects the improvement in the bank's asset risk and profitability, driven by robust economic recovery, as well as ease of liquidity constraints, after the bank successfully raised foreign currency debt sufficient to cover maturities until 2022.
In October, DBM raised 500 million in debt from the international capital markets, an amount, which is seen as sufficient to cover foreign currency debt maturities until 2022, lowering near to medium term risks on foreign currency funding for the bank.
“DBM's BCA of b3 reflects the bank's very strong capitalization, after a capital injection by the government at the end of 2016, modest but improving asset risk and profitability, after the revision of the DBM Law to restrict lending to commercial projects only. The BCA also reflects the bank's modest liquidity and funding, a result of its policy mandate to lend to export-oriented businesses and also because the bank does not take deposits from retail customers,” Moody’s said.