Mongolia Rating Cut as Moody’s Expects Elevated Debt Burden
Mongolia’s debt rating was downgraded by Moody’s Investors Service as there is “heightened uncertainty” over the government’s ability to meet its debt service obligations over the next two years and an expectation that the debt will increase.
The nation’s long-term issuer and senior unsecured rating was cut one step to Caa1 from B3 by Moody’s, the same level as Barbados and Belarus, with a stable outlook, the debt rating company announced on Friday.
The new government has to reckon with a multitude of problems – the economy is contracting, the currency is in freefall and the budget deficit has ballooned. It declared a crisis soon after coming to office, announced austerity measures and a plan to stabilize the economy, and last month held talks with the International Monetary Fund to discuss support.
“The government’s fiscal strength, and the Mongolian economy’s external position, have deteriorated significantly,” Moody’s said in its statement. “The government is reliant on securing external finance from a combination of multilateral and bilateral sources, the availability of which is not ascertained.’’
The Ministry of Finance responded to the downgrade with a statement that the government “remains committed to overcoming the current short-term situation in a prudent and sustainable manner” and the government’s “proactive economic, fiscal adjustments and proposed measures are in line with the policy recommendations of the IMF and World Bank.’’
The country faces $800 million in external debt service obligations in 2017, equivalent to 7.5 percent of GDP, Moody’s said. In addition to these existing debts, the budget deficit this year is projected to be 19.5 percent of gross domestic product, up from five percent in 2015, according to the statement.
“Failure to secure financing, particularly in the context of a further deterioration in growth and debt dynamics, would raise the risks of a balance of payments crisis and debt restructuring,’’ according to the Moody’s statement.
Reversal of that deficit will take “many years,’’ Moody’s said. “With limited room to cut spending or generate revenues until mining production and exports significantly ramp up, deficits will remain in double digits in 2017 and 2018.’’ While Moody’s expects only a slight pick-up in GDP next year, an improvement in mining-related investment will lead to better growth from 2018, the agency said.
“It’s worth noting that credit rating changes rely on lagging economic indicators, and new signs of revival in Mongolia’s economy are starting to take shape,” Bilguun Ankhbayar, Chief Executive Officer of the Mongolian Investment Banking Group, said by e-mail.
“As mineral prices rally and policy makers indicate that a bailout by international financial institutions is imminent, the sentiment that tugrik may be bottoming is prevailing in Ulaanbaatar,’’ Bilguun added.