Fitch Affirms Mongolia at ‘B-’; Rates Proposed Exchange Offer ‘B-(EXP)’
Fitch Ratings has affirmed Mongolia’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘B-’ with a Stable Outlook. The Country Ceiling is affirmed at ‘B-’. The Short-Term Foreign- and Local Currency IDRs have been affirmed at ‘B’ and the senior unsecured rating has been affirmed at ‘B-’. Fitch has assigned a ‘B-(EXP)’ rating to the government’s proposed US dollar-denominated senior unsecured notes that will be issued in part to fund an exchange offer for up to USD580m of government-guaranteed bonds issued by The Development Bank of Mongolia (DBM) that are maturing on 21 March 2017. The assignment of the final ratings is contingent on the receipt of final documents materially conforming to information already reviewed. KEY RATING DRIVERS The affirmation of the IDRs with a Stable Outlook and the assignment of the expected rating reflect the following key rating drivers: An IMF staff-level agreement and our estimate of Mongolia’s existing liquidity resources provide Fitch sufficient confidence that the sovereign can meet its immediate external debt obligations, including the forthcoming DBM maturity. Fitch believes the proposed IMF programme will improve Mongolia’s market access and could also allow existing liquidity resources to be deployed without compromising the sovereign’s ability to service other maturing debt obligations, as initial disbursements under the IMF facility are likely to be insufficient to meet the upcoming DBM bond maturity. The exchange offer allows DBM note holders until 1 March 2017 to tender their notes. Under Fitch’s Sovereign Rating Criteria, the exchange offer does not constitute a Distressed Debt Exchange (DDE). Although there is potentially a material reduction in terms compared with the original contractual terms, primarily because of a maturity extension, the agency does not consider the exchange to be necessary to avoid a traditional payment default on the guaranteed DBM bond. Both factors would need to apply in order for the debt exchange to be classified as a DDE under our criteria. Mongolia’s credit profile remains under pressure since our downgrade of the sovereign IDR to ‘B-’/Stable in November 2016, but Fitch believes that the sovereign has the capacity and the willingness to service its immediate debt liabilities, including the guaranteed DBM liabilities. This assessment reflects Mongolia’s official foreign reserve holdings of USD1.3bn as of end-2016 combined with our estimate of approximately USD400m of remaining headroom under the Bank of Mongolia’s bilateral swap facility with the People’s Bank of China (PBOC), though the latter figure remains unconfirmed by the authorities. The sovereign’s ability to remain current on its external debt obligations is further supported by a recently proposed IMF-supported programme. On 19 February 2017, the IMF announced staff-level agreement on an Extended Fund Facility (EFF). The total programme size is expected to be about USD5.5bn, including USD440m under the IMF EFF, up to USD3bn in multilateral and bilateral support, and an extension of the CNY15bn (USD2.2bn) PBOC swap facility. Disbursements under the programme are dependent on the completion of prior actions and board level approval, which is likely to occur in late March. Fitch believes that there is a high likelihood of IMF board level approval, which would provide Mongolia additional flexibility to meet other forthcoming debt maturities over the rating horizon. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch’s proprietary SRM assigns Mongolia a score equivalent to a rating of ‘B-’ on the Long-Term Foreign-Currency IDR scale. Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to rated peers, as follows: – Macro: +1 notch, to reflect Mongolia’s high medium-term growth prospects due to the development of the second phase of Oyu Tolgoi mine. – External Finances: -1 notch, to reflect weaknesses in Mongolia’s external finances not captured in the SRM, including the very high net external debt burden and large external financing needs relative to reserves. Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could lead to negative action, individually or collectively are: – Difficulty meeting imminent external financing needs, for example if multilateral and bilateral support is not forthcoming. – Failure to remain current on IMF programme guidelines following programme implementation. – Emergence of systemic financial stress The main factors that could lead to positive rating action, individually or collectively are: – Implementation of credible and coherent macroeconomic policy-making that improves Mongolia’s basic economic stability. – A track record of meeting stated fiscal targets, contributing to an improved outlook for government debt ratios. – Evidence of substantial improvement in the country’s external liquidity position, for example through a build-up of reserve buffers. KEY ASSUMPTIONS – Fitch assumes the IMF staff-level agreement receives board approval. – Fitch assumes that the DBM debt exchange offer will go ahead as proposed.