Cover Mongolia: [BREAKING: Mongolia looks to tap USD bond market again, Moody's rates it B2]

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Friday, January 15, 2015

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Mongolia looking to tap dollar bond market for second time

January 14 (fastFT) Mongolia is looking to take the plunge into the international bond markets for the first time in just over three years.

The landlocked mining-focused economy has got a number of Western banks on board to arrange investor meetings next week, writes Joel Lewin.

Mongolia last tapped dollar bond markets in late 2012, offering $1.5bn in debt that earned the moniker ‘Genghis bonds’. At the time, it managed to borrow at a lower yield than Spain. Now, the yields stand at 8.64 per cent, up from 4.5 per cent as recently as May.

Sentiment towards emerging markets has been heading rapidly south over the last 12 months amid a US rate rise, slowing growth and a commodities rout, which has certainly done no favours for Mongolia, where mining accounts for about a fifth of GDP.

The cost of borrowing in dollars for developing countries has jumped over the last year, and any looking to issue bonds face a potentially tricky task getting investors on board.

Last year, Ghana had to offer 10 per cent to borrow $1bn in 15-year debt, far higher than expected, while Iraq, Kurdistan and Pakistan were forced to rethink borrowing plans as a slowdown in China, a rise in official US borrowing costs and falling commodity prices diminished demand for their bonds.

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Moody's assigns (P)B2 rating to bonds issued under Mongolia's Medium Term Note Program

Singapore, January 14, 2016 -- Moody's Investors Service has assigned a provisional long-term rating of (P)B2 applicable to the forthcoming drawdown under the US$5,000,000,000 Global Medium Term Note Program of the Government of Mongolia, in line with the Government of Mongolia's B2 issuer rating. The outlook on the Government of Mongolia's B2 issuer rating is negative.

The rating is subject to receipt of final documentation, the terms and conditions of which are not expected to change in any material way from the draft documents reviewed by Moody's.

RATINGS RATIONALE

Mongolia's B2 government bond rating is supported by the country's strong economic potential, driven in large part by its abundant natural resource wealth. However, slowing growth due to falling commodity prices, coupled with sizeable fiscal deficits and a thin foreign reserve cover, has weighed on credit quality. Based on Moody's Sovereign Bond Methodology, the three-notch ratings range for Mongolia is B2-Caa1.

The high dependency of the economy on mining and agriculture leaves the growth path vulnerable to mineral price volatility and occasional extremely severe winters. The development of the Oyu Tolgoi copper and gold deposits, and other large mineral deposits, such as high-grade coking coal in Tavan Tolgoi, will be transformational for the Mongolian economy. Growth and inward investment flows will, over time, curb the domestic and external pressures that Mongolia currently faces, and support its credit profile at a level commensurate with a B2 rating.

Moody's downgrade of Mongolia's government bond rating to B2 from B1 in July 2014 took into account a worsening external liquidity position and the government's expansionary policy stance. The decision to maintain a negative outlook at that time highlighted the risk of an additional decline in foreign exchange reserves, continued rapid credit growth and the potential for further deterioration in debt metrics.

Although some of the pressures we identified in 2014 have since abated, in January 2016 we affirmed the B2 rating and maintained a negative outlook. The external liquidity position, including the current account balance and the level of reserves, deteriorated initially but has now stabilized. The central bank has tightened monetary policy. Credit growth has cooled. And the government has taken steps -- albeit haltingly -- to arrest the deterioration in debt metrics.

At the same time, the external environment has worsened. The combination of falling commodities prices and lower growth in China (Aa3 stable) has undermined export revenues and related investment flows that drive output in Mongolia. Accordingly, we expect growth to decline to 2.5% in 2015, from 11.6% in 2013. The government has struggled to cope with the impact of the shock. Moody's estimates that the fiscal deficit remains high, at around 6.6% as of the end of 2015. General government debt levels have climbed further, and Moody's does not expect them to peak until 2017, at close to 60%. Economy-wide external debt has continued to rise. Moody's projects it to hit 181.8% of GDP in 2015 and closer to 190% in 2016. Mongolia's score on our External Vulnerability Indicator, which measures the adequacy of foreign reserves relative to short-term and maturing long-term external debt, should peak at over 300% in 2017.

However, beyond that horizon, there is a strong prospect of growth and inward investment flows resuming to adequate levels to address these vulnerabilities. The key driver for the affirmation of the B2 rating is our expectation of an improvement in the outlook for growth over the medium term, led by foreign direct investment in large mining projects -- in particular the development of the second phase of the Oyu Tolgoi copper and gold mine over the next seven years. Although Mongolia's external liquidity position will remain strained for some time, future export and investment revenue streams from the projects should result in credit risks moderating towards the end of this decade.

A resumption in growth would support the authorities' efforts to rein in rising domestic and external debt. The government's medium-term fiscal framework sets out a programme for reducing first primary deficits, and subsequently fiscal deficits towards the end of the decade. While the framework rests on a number of optimistic assumptions, our view is that growth should keep Mongolia's economic and debt metrics consistent with a B2 rating. Despite the persistence of credit-negative pressures in recent years, most of Mongolia's key credit metrics, including growth, the fiscal balance and the debt burden, should converge with those of similarly rated sovereigns over the rating horizon, if mining projects materialize as Moody's anticipates.

RATING OUTLOOK

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Moody's affirms Mongolia's B2 sovereign rating; negative outlook

Singapore, January 14, 2016 -- Moody's Investors Service has today affirmed Mongolia's government bond rating at B2. The outlook on the rating remains negative. Concurrently, Moody's has affirmed the government's B2 issuer rating, its senior unsecured MTN rating at (P)B2 and the short-term Not Prime issuer rating.

The affirmation of the rating signifies Moody's view that Mongolia's credit profile will remain in line with B2 peers over the medium term, with current credit-negative trends dissipating over the coming one to two years. Key credit supports include strong potential growth and abundant mineral resource wealth.

The decision to maintain a negative outlook reflects Moody's view that while some of the credit pressures that drove our assignment of the outlook in July 2014 have diminished, others have emerged. The external environment has worsened, particularly in relation to Mongolia's major commodities exports. Until such time as a ramp-up in production and exports from large mining projects occurs, risks stemming from the country's external position will remain elevated. At the same time, the government's debt burden has not fallen and fiscal space is limited.

Mongolia's long-term local currency bond and bank deposit ceilings are unchanged at Ba3. The long-term foreign currency bond and bank deposit ceilings are unchanged at B1 and B3, respectively. The foreign currency short-term bond and bank deposit ceilings are unchanged 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.

RATINGS RATIONALE

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Link to release

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