Fitch affirms Mongolia at ‘B’; Outlook Stable

2022-05-19 16:45:37

Ulaanbaatar /MONTSAME/. Fitch Ratings on May 18 announced that it kept Mongolia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) unchanged or at ‘B’ with a Stable Outlook.

According to the press release, the economic outlook in Mongolia is stable on the following grounds:

Structural Strengths, External Vulnerabilities: Mongolia's ratings are underpinned by governance indicators and per capita income that are strong relative to 'B' peers, and favourable medium-term growth prospects. The ratings are constrained by the country's high reliance on external funding, narrow economic base predominately focused on commodity exports to China, and recurring bouts of political volatility.

Near-Term Growth Remains Subdued: Fitch forecasts growth will remain subdued this year at 1.2%, following 1.4% in 2021, despite elevated commodity prices and the re-opening of international borders after achieving high Covid-19 vaccination rates. However, coal exports and other merchandise trade have been severely disrupted by ongoing closures of the border with China, Mongolia's largest trading partner, under the former's "dynamic zero Covid" policy.

Fitch expects border disruptions to ease in 2023, although further downside risk to growth could emerge if trade disruptions with China are more prolonged. Global economic spill-overs from the war in Ukraine and supply bottlenecks from import disruptions with Russia and China are leading to inflationary pressures, which will weigh on real incomes and private consumption.

Favourable Medium-Term Growth Prospects: Fitch projects GDP growth will accelerate to 6.3% in 2023 and 6.8% in 2024, as headwinds from trade disruptions and the war in Ukraine wane, and China's demand for Mongolia's key commodity exports remains reasonably buoyant. Mongolia also has the potential to harness its generous natural resource endowments, as the underground phase of the Oyu Tolgoi (OT) mine becomes operational, and improved cross-border infrastructure connectivity unleashes more economic benefits for the country.

Progress in OT Development: The recent agreement over the strategic Oyu Tolgoi (OT) mine, in which the government holds 34%, indicates easing of strained relations between the government and foreign investors over project delays, cost overruns and taxation. We believe the agreement bodes well for the continued development of the underground phase, with potential positive spill-overs to Mongolia's export receipts, fiscal accounts and foreign-investor sentiment. However, recurring bouts of political volatility over resource nationalism weigh on the rating.

Sizable Budget Deficits: Fitch forecasts the budget deficit to widen to 4.4% of GDP in 2022 (B median: 4.7%), from an estimated 3.0% in 2021, as we assume that revenue growth will be lower than the government's baseline expectations. We forecast the budget deficit to narrow to 3.7% in 2023 on stronger revenue collection as Mongolia's economic recovery gains traction. Part of the pandemic-related social welfare spending, including an increase in child money allowance (an average of 3.1% of GDP for 2021-2022), will be maintained.

Click here for the full press release.

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