ECNETNews reports that Mongolia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been upgraded to ‘B+’ from ‘B’ by Fitch Ratings, with a Stable Outlook.
The comprehensive rating actions list is provided at the end of this update.
KEY RATING DRIVERS
Mining Sector Fuels Economic Resilience: The upgrade reflects Mongolia’s improved public and external debt positions, attributed to robust performance in the mining sector, significantly surpassing Fitch’s earlier projections. Increased foreign exchange reserves, decreased debt levels, and controlled external debt maturities enhance the country’s capability to handle commodity market fluctuations, although vulnerabilities to external conditions persist. Policy uncertainties have diminished following the recent elections.
Positive Growth Forecasts: Projections indicate real GDP growth averaging around 6% from 2024 to 2026, outpacing the anticipated ‘B’ category median of approximately 4%. This growth is fueled by ongoing expansions in coal and copper mining alongside solid activity in non-mining sectors. Coal exports are notably strong, stemming from heightened regional demand, primarily from China, aided by improved transport infrastructure. The strategic Oyu Tolgoi copper mine’s underground development is expected to yield higher production volumes starting from 2025.
Fiscal Health on the Rise: A balanced government budget is anticipated for 2024, followed by manageable fiscal deficits of 3% of GDP in 2025-2026, reverting from a surplus of nearly 3% of GDP in 2023 as government spending aligns with escalating mining revenues. The recent parliamentary budget amendment for 2024 indicates a balanced fiscal outlook, complemented by a draft budget projecting a 1% of GDP surplus for 2025.
Budget Growth Projections: The government forecasts a remarkable 26% increase in revenue and a 36% rise in spending for 2024 compared to 2023 figures. For 2025, anticipated revenue growth is 20%, with spending rising by 17%. While these revenue growth estimates may appear optimistic, the emphasis on capital expenditures offers potential for achieving fiscal goals, with recent data reflecting an annualized fiscal surplus approaching 3% of GDP in early 2024.
Stable Debt and Controlled Maturities: Predictions indicate stabilization of government debt at approximately 44% of GDP from 2024 onwards, significantly lower than the projected ‘B’ median of over 50%. New regulations favor concessional funding and mandate the allocation of surpluses for debt repayments, allowing for net borrowing. Upcoming debt maturities are projected at just over USD400 million in 2025 and around USD1 billion in 2026.
Government Deposit Growth: Mongolia’s government maintains deposits exceeding 10% of GDP, inclusive of 5% attributed to the Future Heritage Fund (FHF) and 2% in the Fiscal Stabilization Fund. These funds are financed through mineral revenues held at the Bank of Mongolia (BOM), intended for international investment. A recent sovereign wealth fund law mandates rerouting some FHF transfers to a new Development Fund aimed at local project financing, although its operationalization may take years.
Current Account Deficit Management: As domestic demand accelerates, the current account deficit (CAD) is expected to rise to 6% of GDP in 2024, reaching 7% in 2025-2026, transitioning from a surplus of under 1% in 2023. This CAD will mostly be counterbalanced by foreign direct investment (FDI) despite exceeding the anticipated ‘B’ median CAD of less than 3% of GDP.
Strengthening Foreign Reserves: The BOM utilized the 2023 current account surplus to bolster its foreign exchange reserves, which stood at USD4.8 billion as of August 2024, representing a substantial cushion against external payments. In addition to rebuilding reserves, the BOM has been repaying swap liabilities, leading to a significant increase in net foreign assets.
Ongoing External Vulnerabilities: Mongolia’s net external debt remains high at approximately 130% of GDP as of late 2023, significantly above the ‘B’ median, with over 30% derived from FDI and over 20% from concessional loans. These sources are expected to sustain funding stability, although Mongolia’s reliance on commodity exports, particularly to China, continues to position it among the world’s most dependent economies.
Pro-Cyclical Fiscal Policies Persist: A widening of the non-mineral primary fiscal deficit to 10% of non-mining gross value added is anticipated for 2024, increasing further in 2025. Despite a recent interest rate cut, inflationary pressures from government spending and rapid private credit growth have emerged, indicating the need for careful monetary policy balancing.
Strong Structural Indicators: Mongolia presents favorable scores on World Bank Governance Indicators (WBGIs), driven by mining sector advancements contributing to rising per capita income compared to ‘B’ category peers. The governing party is expected to maintain consistent policy direction following the June elections.
ESG Governance Assessment: Mongolia holds notable ESG Relevance Scores for political stability, rule of law, and corruption control, reflecting the significant impact of WBGIs in the Sovereign Rating Model assessments. Its medium WBGI ranking places Mongolia in the 46th percentile.
