Moody's Investors Service revised the outlook on Mongolia's issuer ratings to negative from stable, the credit rating agency reported last week.
The decision reflects rising external vulnerability risks related to a sharp fall in export revenue at a time when access to external financing is highly uncertain, threatening already weak foreign-exchange reserve adequacy. The agency expects the government's borrowing requirements to increase markedly, in part to fund a large stimulus package, which raises liquidity risks.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, and falling asset prices are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under its Environmental, Social, and Governance framework, given the substantial implications for public health and safety.
“For Mongolia, pressures on the sovereign's external position exacerbates external vulnerability risks, particularly ahead of large repayment obligations on external debt that will start to come due in 2021,” the credit rater noted.
Moody’s affirmed B3 rating reflects Mongolia's existing credit challenges, including long-standing external and liquidity risks.
“A broadly balanced government budget coupled with high nominal GDP growth in recent years has reduced the debt burden from high levels. However a slowdown in growth this year due to the impact of the coronavirus on global and Chinese demand for coal and the government's announced fiscal stimulus measures will increase borrowing requirements and prevent a further decline in the debt burden, delaying potential improvements in weak fiscal strength. Moreover, weak governance and policy effectiveness continue to impede the government's capacity to shelter the economy and public finances from commodity price cycles,” it said in the statement.
Mongolia's country ceilings remain unchanged: the local-currency bond and deposit ceilings remain at Ba2, the long-term foreign currency deposit ceiling at Caa1, and the long-term foreign currency bond ceiling at B1; all short-term foreign currency ceilings also remain unchanged at “Not Prime”.
Factors that could lead to changes in rating
To return to a stable rating outlook, Moody’s requires Mongolia to increasing confidence that the country will be able to refinance upcoming external debt maturities at moderate costs while preserving macroeconomic stability. This could be driven by improvements in the management of domestic public finances, containing the government's funding requirements and the overall economy's external financing needs.
Downward rating pressures would likely transpire from persistent external financing gaps that threaten macroeconomic stability, the agency added. A more severe deterioration in fiscal and debt metrics than Moody's currently expects would add to such pressures. While not Moody's current expectation, indications that the government was likely to participate in debt service relief initiatives which Moody's concluded were likely to entail losses for private sector creditors would be negative for the rating.
