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Wednesday, July 6, 2011

Mongolia Briefing is a magazine and daily news service about doing business in Mongolia. We cover topics relating to the Mongolian economy, the market in Mongolia, foreign direct investment and Mongolian law and tax. It is written in-house by the foreign investment professionals at Dezan Shira & Associates

Major Rating Agencies Downgrade Mongolia’s Banking System and Business Environment

By Elena Fehrbach

May 25 – Moody’s Investor Service (MIS), a subsidiary of Moody’s Corporation has just released its assessment of the Mongolia’s banking system. According to the report, MIS has assigned negative outlook for the banking system in Mongolia for the period of 12 to 18 months. MIS has supported the negative assessment by a number of reasons that in summary can be described as “challenges in managing the demand from rapidly growing economy.”

Among the main downgrading reasons, MIS report is mentioning the developing nature of the legal framework, high loan concentration and weak risk-monitoring system.

Hyun Hee Park, an analyst at MIS who has prepared the report was specifically examining “the Mongolian banking system’s operating environment, asset quality and capital, funding and liquidity, profitability and efficiency, and systemic support.” In terms of the amount of capital available in Mongolian banks, he mentioned that one of the drawbacks of the banking system in Mongolia is the limited capital that can only provide a one weak buffer resource to absorb losses in the worst case scenario.

With regard to the liquidity and funding, Hyun Hee Park forecasts that “the conditions for the banks will remain tight despite some benefit from monetary easing. And at the same time, the key driver for underlying liquidity pressure will be very high pace of loan growth.”

The four largest banks in Mongolia that were analyzed have a standalone baseline credit assessment (BCA) of B1, local currency deposit rating of B1 and overall stable rating outlook. The stable rating outlook for the examined banks is opposite to the general negative outlook of the banking system, which in its turn, represents substantial downside risk, as assessed by Hyun Hee Park.

At the same time, Standard & Poor’s Ratings Services downgrades the outlook on Mongolia from “stable” to “negative.” It also affirms the “BB-“ long-term and “B” short-term sovereign credit ratings and “BB-“ issue rating on the country’s senior unsecured notes. The “BB” transfer and convertibility assessment has remained unchanged.

As noted by Agost Benard, a credit analyst at Standard and Poor: “Mongolia’s fiscal and external profiles could deteriorate materially over the next year or two in the absence of a significant improvement in policy-making regarding government borrowing, public spending, and the business environment.” He also expects the external and fiscal risks to increase further during the next several years due to Government’s plan to make a bigger debt financing of the large scale development projects.

On the positive side, the announcement mentions that “Mongolia’s strong growth potential offsets some of the weaknesses in the sovereign’s creditworthiness. The sovereign rating also benefits from the government’s modest interest expense.”

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