Moody's: Near-term external pressures weigh on Mongolia's credit profile

Moody's Investors Service says that Mongolia's (B2 negative) credit profile will come under pressure over the next 12 to 18 months, due to a combination of falling commodity prices and lower growth in China (Aa3 stable).

Mongolia's slim reserve buffers, which are insufficient to cover its short-term external and maturing long-term debt over the next two years, exacerbate this situation.

Over time, however, Moody's expects growth and inward investment flows will reduce these domestic and external pressures. This expectation underpins Moody's recent affirmation of the country's B2 government bond rating and negative outlook.

Moody's analysis is contained in its just-released report entitled "Government of Mongolia -- Near-Term External Pressures Weigh on Credit Profile."

Since Moody's downgraded the government's bond rating from B1 in July 2014, some of the strains on its credit profile have abated.

Specifically, the central bank has reversed monetary and quasi-fiscal stimulus measures that contributed to a rapid build-up in credit growth and inflation through 2011 and 2012. Moreover, the resolution in May 2015 of a three-year dispute over the Oyu Tolgoi mining project will unlock foreign investment and export revenues over the rating horizon. And while Mongolia's external liquidity position had deteriorated for some time, it has now stabilized. However, this stabilization has occurred at relatively weak levels, at a time when the external environment has become more challenging. Low commodity prices are creating near-term liquidity pressures that could turn particularly acute when bond repayments come due in 2017, 2018 and 2022.

Beyond 2021, Moody's expects growth and inward investment flows will resume to adequate levels to address Mongolia's vulnerabilities, led by foreign direct investment in large mining projects -- in particular Oyu Tolgoi. Although the external liquidity position will remain strained for some time, future export and investment revenue streams from the Oyu Tolgoi project should result in credit risks moderating towards the end of the decade.

Moody's report further highlights that Mongolia's credit profile and the challenges that it faces are closely comparable to several B2-rated Sub-Saharan African economies that, like Mongolia, are prominent commodity exporters.