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Moody's downgrades Mongolia's sovereign rating to B2

July 20, 2014

Moody's Investors Service has downgraded Mongolia's foreign currency government bond rating to B2 from B1. The outlook remains negative. Concurrently, the government's issuer rating has been downgraded to B2. Mongolia's senior unsecured rating has been lowered to B2 and the government's senior unsecured MTN rating to (P)B2.

The issuer's short-term rating remains at Not Prime.

In a related rating action, Moody's has downgraded the rating of the government-owned Development Bank of Mongolia LLC (DBM) to B2 from B1.

The outlook remains negative. DBM's senior unsecured rating has been lowered to B2 and its senior unsecured MTN rating to (P)B2. Since DBM's payment obligations carry a credit guarantee of the Government of Mongolia, its debt obligations justify a rating at the same level.

The long-term local currency country risk ceiling remains unchanged at Ba3. The long-term foreign currency deposit ceiling is revised to B3 from B2, while the foreign currency bond ceiling has been revised to B1 from Ba3. All short-term ceilings remain at Not Prime. These ceilings act as a cap on ratings that can be assigned to the foreign- and local-currency obligations of entities domiciled in the country.


Moody's decision to downgrade Mongolia is driven by the country's strained external liquidity position, as reflected by a sharp loss in foreign-exchange reserves. Expansionary monetary and fiscal policies have added to demand pressures, fueled inflation, and heightened spillover risks to the banking system and the balance of payments. Accompanied by a continued rise in the external debt burden, these factors increase the country's vulnerability to external and domestic shocks relative to rating peers.

First driver -- A sharp deterioration in the external liquidity position

Total foreign reserves have fallen rapidly, to $1.6 billion in May 2014 from $2.2 billion at the start of the year, in spite of a narrowing current-account deficit. The sharp pace of deterioration comes as foreign direct investment (FDI) has more than halved from levels last year.

Expansionary policies have fueled demand for imports, adding further pressure to the external reserve position. Reserves would most likely be lower, were it not for the Bank of Mongolia drawing down on a bilateral swap facility with the People's Bank of China.

The investment regime remains unpredictable, suggesting that FDI will remain subdued at least over this year. Further ahead, instability in the investment regime threatens to dampen the development of the mining sector. This would have negative consequences on Mongolia's ability to ramp up foreign-exchange export earnings to repay its external debt. We expect reserves to remain weak this year, significantly increasing Mongolia's external vulnerabilities.

Mongolia's rising external debt repayment burden is compounded by the decline of official foreign-exchange reserves to a low level. The development of Mongolia's mineral resources will play an increasingly important role in this context. Moody's External Vulnerability Indicator

-- which gauges the adequacy of reserves with respect to maturing external debt obligations over the next year -- has risen to an estimated 130% in 2014 and will increase further to 196% in 2015, significantly above a prudent 100% threshold for systems that are heavily dependent on foreign creditors.

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Source: EMBIN (Emerging Markets Business Information News)

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