By Elena Fehrbach
Moody’s Investors Service has changed the outlook on Mongolia’s government bond from stable to negative. At the same time, Moody’s affirmed government’s issuer and bond B1 ratings, unsecured MNT rating at (P)B1 and the issuer’s short-term Not Prime issuer rating.
As part of the rating action, Moody’s has changed the outlook on the government-owned bond raised by the Development Bank of Mongolia (DBM) from stable to negative and affirmed DBM’s senior unsecured B1 rating and its senior unsecured MNT (P)B1 rating. DBM’s debt obligations justify rating at the same level as the government of Mongolia as DBM’s payment obligations carry a credit guarantee of the government.
Currency-related ceilings have been affirmed as follows:
- Ba3 ceiling for long-term local currency country risk ceiling
- Ba3 ceiling for long-term foreign currency bond
- B2 ceiling for bank deposits
- Not Prime ceiling for short-term foreign currency debt and deposits
The rationale behind the change of outlook to negative is based on the rise in the external debt obligations over the recent years, very sharp fall in foreign exchange reserves and escalating credit growth during past 2 years. Such situation provides a possibility of external payment and a currency crisis over the next several years. The banking sector’s stability is also under threat due to elevated inflation and fast credit growth that could have a negative impact on the balance of payments.
External debt position
Over the last two years the external debt of Mongolia almost doubled and reached US$18.9 billion in 2013. The resulting number is 156.8 percent of country’s GDP, which is significantly higher than the median for country peers with ratings ranging B1 to B3. As a share of current account receipts, the increase is even higher at 352.0 percent in 2013 compared to 162.2 percent in 2011.
Overall dependence on the external market funds has increased over the past years after issuance of the global bonds and a decline in concessional external borrowings. Domestic public debt has extended since 2009 to the extend when weakening local currency is adding an additional pressure on repayment of foreign currency-denominated debt which constitutes a significant portion of the total borrowings.
Heightened strains on the external liquidity position
The change in the external liquidity position has become very evident over the past year when gross international reserves dropped to US$2.4 billion in January 2014 from US$4.1 billion in December 2012.
The pressure in the balance of payments is very noticeable in both capital and current accounts. Due to unstable commodities prices and variable demand from China, the export of commodities has decreased and became too vulnerable to external factors. In addition to that, the FDI inflow has declined due to completion of the first phase of Oyu Tolgoi mining operation and an uncertainty in investment policy. Continuing monetary expansion would add to the existing inflationary pressure, hence increasing the risk of capital flight and further weaken the external payment position.
Extensive and liberal monetary policies adopted by the Central Bank in 2013 have fueled rapid credit growth reaching 82.2 percent in 2013. This could negatively influence the asset quality of the banks given difficulties banks are experiencing in pricing borrowers’ credit risks due to loan rate caps, concentration of loans in real estate, and possibility that refinancing will be challenging once expansionary policy is withdrawn.
Rationale for affirming the B1 government bond rating
Mongolia’s B1 sovereign rating has been affirmed. It reflects the fact that although external liquidity is under pressure, a balance of payment crisis does not appear imminent as there are no significant debt obligations maturing this year. The first large sovereign bond repayment is due in 2017.
Also, a gradual phase-out of monetary stimulus measures have begun that may ease demand pressure to some extent.
Key drivers for the rating to be changed
Upward movement of the rating and outlook may result from the following:
- Exchange rate stability and greater price
- Growth of official foreign exchange reserves
- Positive track record of compliance to fiscal rules
- Consistent mineral resource development under a stable investment regime
Downgrade of the rating and outlook may be a result of the following:
- Continued rapid rise in external debt or decline in international reserves
- Continued growth of high volume loans and inflationary pressure
- Long-term continued off-budget fiscal spending
- Setback to foreign direct investment in Mongolia