Bangkok--22 Dec--Standard & Poor's
Standard & Poor's Ratings Services said today it had revised the outlook on its 'BB-' foreign and local currency long-term sovereign credit ratings on Mongolia to negative from stable, while at the same time affirming the 'BB-' foreign and local currency sovereign credit rating for Mongolia.
"The rating actions reflects the risks that Mongolia's fiscal and debt credit metrics could see substantial deterioration in the event that the recent steep fall in the price of copper--the country's main source of fiscal revenue and export receipts--is not countered by prompt corrective fiscal measures," said Standard & Poor's credit analyst Agost Benard.
While fiscal performance for the current year appears to be on track, the 2009 budget, said to be recently approved by Parliament, targets a deficit of 6.1% of GDP, with apparently no attempt to curb increases in social transfers, salaries, and an ambitious capital-expenditure program despite the expected revenue shortfall, given that copper prices are an estimated 50% below the US$6,700/ton price originally assumed in the budget. Even though the authorities may be able to cover next year's expected shortfall of a reported Mongolian tugrik (MNT) 500 billion by drawing on accumulated fiscal savings held in a special fund, a deficit target of this magnitude appears to signal the government's inability or unwillingness to adjust spending plans in response to changing economic conditions. As such, Mongolia's strong fiscal performance over recent years and the attendant improvement in public debt ratios could be jeopardized.
The revision in outlook to negative also incorporates the potential additional fiscal pressure posed by growing contingent liabilities in the banking system. With credit growth running at more than 60% year on year against inadequate risk management and lending practices, the recent passage of a 100% deposit guarantee, the reported approval by cabinet of a US$500 million capital injection into the banking system, and the Central Bank's reported takeover of one of the top five banks indicate that the size of contingent liabilities posed by the banking system, as well as the chances of some of it being realized, have risen.
The outlook on the rating will revert to stable if timely corrective policy actions are taken on fiscal expenditure in order to compensate for the expected sharp fall in revenues. Conversely, failure to implement revisions to expenditure plans with the possible drawdown of fiscal reserves accumulated over the past two years would negatively affect Mongolia's net debt ratios, and thus result in downward pressure on the rating. Likewise, failure to effectively deal with rising contingent liabilities in the banking system, with the associated increased likelihood a costly state intervention, could put additional downward pressure on the rating.
Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search.
Media Contact:
David Wargin, New York (1) 212-438-1579, [email protected]
Analyst Contacts:
Agost Benard, Singapore (65) 6239-6347
KimEng Tan, Singapore (65) 6239-6350