Benefits of being a country with good credit rating

2021-06-29 12:10:22

Written by G.Urantuya

For a country, good credit rating is a great opportunity to benefit from global financial markets. The international credit rating agency Fitch Ratings has assessed Mongolia's economic situation on a number of factors and announced that the country’s rating outlook is stable. The country has been assessed by the internationally renowned S&P from 1999 and by Fitch and Moody's since 2005.

On May 25, 2021, Fitch Ratings has affirmed Mongolia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a stable outlook. In other words, Mongolia's credit rating is currently moderate. A country's credit rating significantly affects the credit ratings of its companies. Moreover, foreign investors and other international organizations check the credit rating before deciding whether to start a partnership. Therefore, it is a success that the country's financial and economic situation has been assessed as such in this difficult time of a pandemic. However, the ‘B’ rating is low in the rating range. It is a little above the worst, but still an acceptable score.

Credit rating is an indicator of general economic and financial conditions, and political and social status. Meanwhile, the rating outlook indicates the potential direction of the country's economic and fiscal performance. Nonetheless, this time, the assessment and outlook are better than before. At the same time last year, Moody's assigned a B3 rating (with negative rating outlook) to Mongolia. In March 2021, the rating was affirmed at B3 and the outlook was upgraded to stable.

If the credit rating was downgraded at such a difficult time, it would definitely increase the cost of raising funds from foreign markets. There could also be negative consequences, such as low investor confidence and high interest rates. Policymakers are required to constantly put in great efforts to avoid such risks. The involvement of the private sector plays an important role as well. In other words, to attract more investment, to keep interest rates low, and to be a successful participant in the global financial markets, it is necessary to strive at all levels.

According the assessment this time, the country's governance and per capita income were good compared to other countries at the same level. At the same time, the political instability prevented a rating upgrade. The stable outlook reflects Fitch's assessment that the economic recovery will continue during the remainder of this year and facilitate a modest decline in the government debt/GDP ratio.

Credit ratings of global countries are showing a trend of declining with a considerable risk to the expected economic outlook. Due to the impact from its mining industry, Mongolia’s economic growth has reached 15.5 percent in 2021. Rating agencies forecast that the border movement restrictions that are imposing interruptions on the mining exports are only short-term. It goes without saying that proper management and smart policymaking amid the pandemic are significant.

The conclusion is based on the government’s efforts in vaccination drive and to refrain from lockdown measures as well as the financial incentives and support provided to households and businesses. It is projected that such actions will bring impetus to the recovery of the domestic economy in coming seasons. Last year, the Bank of Mongolia lowered the policy rate down to 6 percent – an all-time record low as well as commercial banks extending the repayment period on consumer loans, and the Government of Mongolia's decision to issue soft loans in various industries within the framework of its MNT 10 trillion economic recovery plan, all have been taken into consideration for the favorable ratings.

A myriad of measures undertaken by the government are viewed by international agencies as the correct steps to avoid economic decline. Not putting foreign investors at risk and having high creditworthiness are important factors. The credit rating has a direct influence on a country’s economy and investment environment in the private sector, highlighted experts.

International agencies warn that Mongolia, who from time to time holds poor credit ratings, needs a policy that seeks opportunities to elevate its level. Poor credit ratings are often followed by worries of foreign investors and foreign credit short-term investment with high interests as well as high interest rates of commercial banks, which will not serve as sufficient support for businesses.

Often defined as a country with non-favorable regulatory environment and political stability, Mongolia shuts out foreign and internal investment since all these take up an important position in the evaluation of the credit risk. A country’s reputation and business trustworthiness are completely dependent upon its credit ratings regardless of positive indicators of domestic enterprises and banks and financial institutions. In other words, higher the country’s reputation and participation in the international markets, greater the opportunities for its domestic businesses to grow further.

In terms of credit ratings, Mongolia’s credit ratings aggressively fell between 2014 and 2016, causing interest rates of the government’s bond to scale up. On 2016, Mongolia was rated with 'Caa1' – the poorest quality and very high credit risk, while in 2007-2013, the country received the highest ratings.