Bangkok--5 Feb--Moody's Investors Service
Moody's Investors Service has placed on review for possible downgrade Mongolia's ratings and ceilings owing to concerns over the rapid deterioration in the country's external payments position and the ability of the government to put in place a policy framework which would ensure balance of payments stability and fiscal sustainability.
The Moody's review affects Mongolia's B1 foreign- and local-currency ratings for government bonds, the Ba2 foreign-currency country ceiling for bonds, the B2 foreign-currency ceiling for bank deposits, as well as the Baa2 local-currency bank deposit ceiling.
Moody's initially assigned Mongolia's B1 ratings in October 2005--they have been unchanged since that time and with a stable outlook until now.
"Gains made in the past two years from the boom in metals prices -- on which Mongolia's economy, budget and balance of payments are heavily dependent -- have been largely wiped out by the sudden collapse in the market, especially for copper, in recent months," says Tom Byrne, a Moody's Senior Vice President.
"Moreover, the pace of depletion in official foreign exchange reserves has been rapid, owing to the fall in exports, meager long-term capital inflows, the intensified dollarization of the country's domestic deposit base and past adherence to a fixed exchange rate policy," adds Byrne.
"At the same time, although official reserves may now adequately cover Mongolia's maturing debt obligations in the year ahead, and are apparently still higher than when Moody's initially assigned its B1 ratings, the continued downturn in export performance and the further weakening in confidence in the togrog could overwhelm the efforts of the authorities to stem the hemorrhage," says Byrne.
"Such a development would raise considerably the risks of a balance of payments crisis, and although the government currently has no outstanding foreign currency bonds in the global market, the ability to repay other foreign currency debt could become impaired," says Byrne.
The collapse in mineral revenues has also swiftly exerted enormous pressure on the government's balance sheet. The abrupt shift of the budget into a large deficit in 2008 and prospects for large deficits in 2009 and 2010 would mean considerable strains on the ability of the government to meet its expenditure obligations and to secure domestic financing without overwhelming the local markets. As a result, the government is reportedly seeking substantial financial assistance from foreign governments and the IMF.
Moreover, Mongolia's investment environment has suffered from a shift from economic liberalism to economic nationalism in recent years. This has impeded the development of the country's highly promising mineral wealth and is now having adverse consequences for its balance of payments and budget.
As a result, at a time of global financial crisis, Mongolia has become more dependent on external debt financing—a situation which complicates the government's ability to plot a course out of its financial troubles.
Moody's rating review will focus on the ability of the government to prevent further deterioration in the country's external payment position and to fashion a program that ensures long-term fiscal and economic stabilization. This would likely involve an assessment of the robustness of the policy framework and also of the extent to which possible enhanced external financial assistance could impart stability.
The last rating action with respect to Mongolia was in December 2006 when Moody's assigned a Baa1 local currency bond ceiling and Baa2 local currency deposit ceiling. The principal methodology used in rating the government of Mongolia is Moody's Sovereign Bond Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory on Moody's website.
Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer Sovereign Risk Group Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308
New York
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653