Moody's: Mongolia's economy still susceptible to volatility

Moody"s Investors Service says that Mongolia"s B1 sovereign bond rating and stable outlook hinges on the absence of significant fiscal pressures, relative macroeconomic stability, and the maintenance of a favorable investment climate in the mining sector.

Moody"s assessment was contained in its just-released "Credit Analysis Mongolia" which serves as an update to investors and is not a rating action.

Moody"s looks at four, overall methodological factors and scores them as follows for Mongolia: economic strength -- low; institutional strength -- low; government financial strength -- low; and susceptibility to event risk -- high.

Moody"s notes that the country"s credit strengths include its strong growth, which is based on rich natural resources, but also underscores credit challenges, stemming from a narrowly-diversified economy, pro-cyclical fiscal policy, and an unpredictable investment regime.

While GDP has moderated to 12.4% in 2012 from the 17.5% pace seen in 2011, overheating pressures are still present, with inflation remaining high, and credit growth elevated. A heavy dependence on global commodity prices and demand from China leave the country vulnerable to growth volatility. Coupled with policy uncertainty, these factors have increased the economy"s susceptibility to boom-bust cycles.

Recent fiscal performance is a credit constraint. Preliminary data suggests that the government is unlikely to meet targets set out by the country"s Fiscal Stability Law. Another constraint is transparency. This is evident in off-budget spending largely channeled through the Development Bank of Mongolia, which also detracts from fiscal discipline.

Event risks are high, driven primarily by economic factors. Over the past two years, large current account deficits were easily financed through debt and FDI inflows. However, with the first phase of the Oyu Tolgoi mining project coming on stream, and flagging investor sentiment, FDI flows have dwindled considerably, imparting a moderate degree of pressure on the balance of payments.

The recent insolvency of the country"s fifth-largest bank, Savings Bank -- which accounted for 8% of banking sector assets -- adds to asset quality concerns and highlights risks related to cross-ownership; a feature common among Mongolian Banks.

Source: Moody`s

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