Fitch Ratings has assigned the Government of Mongolia’s planned medium term note (MTN) programme an expected ‘B+(EXP)’ rating. The agency has also assigned a forthcoming issue of USD-denominated notes under the programme an expected ‘B+(EXP)’ rating. The final ratings are contingent on the receipt of final documentation conforming to information already received. The expected ratings are in line with Mongolia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘B+’. The sovereign’s Long-Term Local-Currency IDR is also ‘B+’. The rating Outlooks are Stable.
The proceeds of the expected note issuance will be used mainly to fund infrastructure investment and other industrial projects. When Fitch affirmed Mongolia’s sovereign ratings at their present levels on 1 November 2012, the agency factored in an expectation of international sovereign debt issuance of benchmark size by end-2012.
These notes are issued under a Global Medium Term Note (GMTN) programme with a ceiling of USD5bn. Fitch emphasises that the GMTN programme’s ratings are for the programme in general, and each individual issue under it may not be assigned the same rating as the programme’s. In particular, in the event that notes were issued denominated in Mongolia’s national currency, the togrog, Fitch would expect to rate such notes in line with the Long-Term Local-Currency IDR, rather than the Long-Term Foreign-Currency IDR. Should Mongolia’s sovereign IDRs change, then ratings assigned to the MTN programme and any notes issued under the programme are also liable to change.
Mongolia emerged from a banking crisis and IMF-supported adjustment programme in 2009-2010 with a framework for strengthened economic and macro-prudential policies. Recovery has been buoyed by the booming natural resource sector: growth is expected to average 14.1% over 2011-2012, while international reserves (including gold) doubled to USD2.9bn in September 2012 from end-2009. Income per head at market exchange rates was exactly aligned with the ‘B’ range median at USD3,000, and should strengthen against the peer group given Fitch’s expectation of rapid economic development. The country’s governance standards are a relative strength in the ‘B’ range.
However, managing the resource boom will be challenging. Mongolia’s commitment to its new fiscal and macro-prudential policy framework has been patchy, leaving the key vulnerabilities that were exposed in 2009 substantially unaddressed. These include a tendency to procyclical fiscal policy, high commodity dependence with minimal fiscal or external buffers to absorb price volatility, and exposure of domestic economic stability to external pressures through the heavily dollarised banking system. Mongolia’s ‘B+’ IDRs balance these weaknesses and rapidly rising sovereign indebtedness (albeit from a low base) against the country’s bright economic prospects as investment to develop the country’s generous natural resource endowment finally begins to bear fruit.
Policy slippages, including strong fiscal spending beyond the ability of the economy to absorb, would exert negative pressure on the ratings. A further rapid increase in sovereign indebtedness, especially if a fast exhaustion of the USD5bn GMTN programme ceiling occurs, could lead to a downgrade of the country. Re-emergence of problems in Mongolia’s banking system requiring extensive sovereign support would also be negative for the ratings. On the other hand, a build-up of fiscal and external buffers, including the policy-mandated Stabilisation Fund for windfall copper revenue, would support a case for an upgrade.