Ratings service downgrades Mongolia’s outlook
Published Friday April 19, 2013
Standard & Poor’s Ratings Services announced Tuesday that it has revised its rating outlook on Mongolia from “stable” to “negative.” The ratings service company also affirmed the “BB-“ long-term and “B” short-term sovereign credit ratings on Mongolia and affirmed its “BB-“ issue rating on the country’s senior unsecured notes. The “BB” transfer and convertibility (T&C) assessment on Mongolia is unchanged.
“We revised the outlook on Mongolia to negative to reflect our opinion that higher policy risk has increased the chances of a downgrade to more than one-in-three for the country over the next six to 18 months,” said Standard & Poor’s credit analyst Agost Benard. “Mongolia’s fiscal and external profiles could deteriorate materially over the next year or two in the absence of a significant improvement in policymaking regarding government borrowing, public spending, and the business environment.”
The announcement by Standard & Poor’s also noted that company may downgrade Mongolia’s outlook if “government borrowing increases substantially,” the “policy risk for the mining sector remains elevated and hurts foreign direct investment (FDI) inflow,” or “exports remain weak.”
The company noted, however, that it may revise the outlook to “stable” if the government “significantly strengthens the management of its debt and investment, and the improvement in mining sector policy and practices enhances FDI inflow and mineral exports.”
“The weak policy environment accentuates the sovereign’s vulnerability stemming from its narrow economic profile,” it added.
Standard & Poor’s said it expects Mongolia’s external and fiscal risks to increase further over the next few years because they expect the government to resort to a greater use of debt to finance its ambitious development strategy. And they noted that although they expect mineral exports to grow fast, they believe that the positive impact of such growth on the current account would be largely offset over the next three years by imports associated with still sizable FDI inflow and the large bill for transportation charges on exports.
“Mongolia’s strong growth potential offsets some of the weaknesses in the sovereign’s creditworthiness. The sovereign rating also benefits from the government’s modest interest expense,” the announcement said.
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