Bangkok--10 Jun--Moody
Moody's Investors Service has removed its review for possible downgrade of Mongolia's ratings, confirming its B1 government bond ratings, but assigning at the same time a negative outlook. This concludes the rating review initiated on February 5, 2009.
"The rating action was supported by the policy tightening undertaken by the Mongolian authorities after the Moody's review was announced on February 5 and the subsequent stabilization of the country's balance of payments, although concerns persist about the durability of the new policy stance and the ability of the authorities to implement far-reaching reform," says Thomas Byrne, a Moody's Senior Vice President.
"The action means that in addition to Mongolia's B1 foreign- and local-currency ratings for government bonds, its Ba2 foreign-currency country ceiling for bonds and B2 foreign-currency ceiling for bank deposits now have a negative outlook, but are no longer under review for possible downgrade," says Byrne.
Moody's had initially assigned Mongolia's B1 ratings in October 2005 and they have not been changed since.
"At the time of the assignment of the ratings, we considered that the seemingly beneficial effects on the country's credit fundamentals of the recently past commodity boom would prove ephemeral," says Byrne.
"Moreover, policy failures, coupled with a severe shock to Mongolia's terms-of-trade from high oil and fuel prices as well as the collapse in copper prices acted to undermine its credit fundamentals last year and into early this year."
"However, in recent months, Mongolia's economic conditions have started to stabilize; the depletion in its official foreign exchange reserves has reversed as the improved policy framework helped restore confidence in the currency and allowed for the government to gain access to financing from the IMF, the multilateral development banks and the government of Japan," adds Byrne.
Mongolia's success in gaining support from the IMF in April and in completing the first program review on June 5 also holds promise for the placing of government finances on a firmer footing for the rest of this year and into next year.
Moreover, if the government is successful in passing into law its draft fiscal responsibility act, then budgetary stability over the long run would be enhanced, and the boom-bust oscillations endemic to a commodity-dependent economy would be dampened. This would definitely improve Mongolia's long-term credit fundamentals.
Moody's believes that credit positive events over the rating outlook horizon would include a continued reduction in inflation, stability in the exchange rate, and further increases in official foreign exchange reserves.
The ability of the government to contain its budget deficit and reduce pressures for unaffordable social welfare spending would also be viewed favorably. Furthermore, the parliament's enactment of a strategic investment pact for the Oyu Tolgoi mining project would improve Mongolia's investment environment and its long-term economic strength.
On the other hand, a relapse into economic instability and a fraying of the policy framework would renew negative ratings pressure.
Moody's time horizon for rating outlooks is generally 12 to 18 months.
The last rating action with respect to Mongolia was on 5 February 2009 when Moody's placed on review for possible downgrade Mongolia's ratings and country ceilings. 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.