CPI up 6.4 percent below BoM’s 8 percent target in 2017 www.gogo.mn

National Statistics Office released the preliminary results of social and economic situations of 2017. According to the report, trade surplus reached a record high of USD 1.9 billion (MNT 4.6 trillion) and trade turnover resulted at USD 10.5 billion. Foreign trade turnover grew by USD 1.3 billion, to USD 6.2 billion.

Moody's upgrades Mongolia's rating to B3; outlook stable www.moodys.com

Singapore, January 18, 2018 -- Moody's Investors Service has today upgraded the Government of Mongolia's long-term issuer ratings and the senior unsecured ratings to B3 from Caa1, and the senior unsecured MTN program rating to (P)B3 from (P)Caa1. The short-term issuer ratings are affirmed at Not Prime. The outlook remains stable.

The key factors driving the rating upgrade are an alleviation in liquidity and external pressures and prospects of a somewhat attenuated sensitivity of Mongolia's credit metrics to fluctuations in commodity prices, if the reforms currently implemented and planned are adhered to.

The refinancing of government debt at the end of last year, combined with measures to narrow the fiscal deficit and windfall gains from higher commodity-related revenues reduce Mongolia's financing needs. In addition, the measures currently implemented under the IMF program, if effective, will contribute to reduce - but not eliminate - the volatility of economic and fiscal outcomes as a result of potential sudden changes in commodity prices and demand.

The stable outlook on Mongolia's B3 rating reflects balanced risks. On the upside, reforms may prove more effective at reducing Mongolia's sensitivity to commodity cycles than we currently envisage. On the downside, and in particular in a less favorable commodity environment, liquidity and external pressures could intensify significantly again. Such a scenario may arise in the event of deviations from the objectives of the reforms planned over time.

Moody's has also raised the local-currency bond and deposit ceilings to Ba2, from Ba3 previously. The long-term foreign currency deposit ceiling is raised to Caa1 from Caa2, and the long-term foreign currency bond ceiling to B1 from B3. All short-term foreign currency 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.

In October 2017, Mongolia refinanced debt maturities that were due in 2018. The refinancing clears immediate government liquidity pressures, pushing back the next repayments of government external debt to 2021. It also alleviates external risks arising from a thin foreign reserve position relative to maturing debt obligations.

The debt refinancing has combined with a narrowing fiscal deficit on account of higher revenue growth as the government has started to implement fiscal measures and benefited from unexpectedly strong commodity-related revenues. As a result, Mongolia's gross borrowing needs have moderated to an estimated 17.7% of GDP in 2018, from over 30.0% of GDP expected at the beginning of last year, when the rating was confirmed at Caa1 following a review for downgrade. We expect Mongolia's financing needs to decline gradually further, albeit remaining at high levels.

A more favorable commodity price environment and stronger demand for Mongolia's exports resulted in the current account deficit narrowing in 2017, to an estimated 5.3% of GDP from 6.1% of GDP in 2016. Moody's forecasts the current account deficit to narrow further to 4.6% of GDP in 2018. Coupled with disbursements from the IMF and other bilateral lenders and stronger foreign direct investment, this supports accretion to foreign exchange reserves. And with the extension of upcoming maturing debt repayments, reserves coverage of debt payments has improved from very weak levels.

We expect the External Vulnerability Indicator, or the ratio of maturing long term and short term external debt obligations relative to foreign exchange reserves to moderate to 144.5% in 2018 and subsequently fall further from these levels although reserves will remain lower than debt repayments due over the next year. While this ratio is still high compared to other sovereigns rated by Moody's, it represents a material moderation of balance of payments pressure from 420.2% in 2017.

IMPLEMENTATION OF WIDE-RANGING REFORMS TARGETED AT IMPROVING ECONOMIC AND FISCAL FUNDAMENTALS

GDP growth surprised on the upside in 2017. Moody's now estimates that GDP increased by 4.2% in 2017 and 3.3% in 2018. This denotes some capacity of the economy to respond to a favorable external environment, and a greater resilience to fiscal and monetary policy tightening than we previously estimated.

The fiscal deficit and debt burden are also narrowing at a faster pace than we previously expected, partly because of the buoyancy offered by a higher growth and commodity price environment. However, as a commodity-reliant economy, Mongolia's susceptibility to commodity price boom-bust cycles remains high, and is reflected in a wide range of possible outcomes in its deficit and debt metrics when subject to positive or negative economic or financial shocks.

Under our baseline assumptions, higher nominal GDP growth contributes to a stabilization in fiscal and external metrics. In turn, a relatively favorable macroeconomic environment affords the government the ability to implement reforms. Structural benchmarks under the IMF's Extended Fund Facility are a primary focus of government policy. These reforms are centered around increasing accountability and restraint over budgetary spending, improving fiscal health through more effective tax collections and reducing pro-cyclical spending by tightening the budgetary process; strengthening the banking system, and enhancing the independence and effectiveness of monetary policy.

While progress has been made in setting up the regulatory and legal framework, adherence to the current reform plans over a sustained period of time would distinguish the current improvements in headline economic and fiscal metrics from previous cycles. Indeed, past experience indicates that in an adverse commodity price environment, previously implemented rules have been relaxed or circumvented, resulting in a reversion to boom-bust cycles.

RATIONALE BEHIND THE STABLE OUTLOOK

The stable outlook indicates risks to Mongolia's rating are balanced.

On the upside, reforms may prove more effective at reducing Mongolia's sensitivity to commodity cycles than we currently envisage, and both fiscal and external buffers may improve.

On the downside, implementation risks would stem primarily from domestic political risks and commodity price fluctuations, both of which have diminished the effectiveness of past reforms. Since reforms have been implemented in an environment of favorable commodity prices and demand, there remains a risk of slippage to pro-cyclical behavior in an adverse commodity scenario.

The stable outlook also captures the potential credit positive or negative implications of the reforms of the banking system. The results of the banks' Asset Quality Review (AQR) are awaited; they will determine capital shortfalls and lay out a response strategy. We expect that the immediate fiscal costs associated with recapitalization of banks will be moderate. Beside these costs, the government's management of this exercise and the measures that are taken to strengthen governance and financial supervision to prevent a renewed erosion of banks' capital in the future will provide important indicators about potential changes in Mongolia's institutional strength.

WHAT COULD CHANGE THE RATING UP

Upward rating pressure could develop as a result of sustained and effective implementation of structural reforms leading to greater confidence that, even in an adverse commodity price environment, macroeconomic volatility and fiscal pro-cyclicality would be reduced.

A build-up of buffers, evident through a lasting strengthening of Mongolia's external liquidity position and/or a meaningful and durable reduction in the government deficit and debt burden would also be credit positive. In particular, these developments would be accompanied by a steady rise in international reserves and increased certainty about the government's ability to meet external debt repayments.

WHAT COULD CHANGE THE RATING DOWN

We would view signs that reform progress slows or seems ineffective at reducing the volatility of Mongolia's credit metrics as credit negative. A renewed material widening of the fiscal deficit, or a weakening of the external payments position such as through a widening trade balance or a reduction in capital inflows, would also weigh on Mongolia's credit profile.

GDP per capita (PPP basis, US$): 12,272 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.1% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -15% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -6.1% (2016 Actual) (also known as External Balance)

External debt/GDP: 216.3% (2016 Actual)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 16 January 2018, a rating committee was called to discuss the rating of the Mongolia, Government of. The main points raised during the discussion were: The issuer's governance and/or management, have materially increased. The systemic risk in which the issuer operates has materially decreased. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

The Asia Foundation Announces Mark Koenig as Mongolia Country Representative www.asiafoundation.org

Ulaanbaatar, January 17, 2018 — The Asia Foundation announces the appointment of Mark Koenig as country representative in Mongolia. In this role, he oversees the Foundation’s development programs in Mongolia, focused on strengthening governance, empowering women, addressing environmental challenges, and improving access to information and education.

Rio Tinto halts shipments from Mongolia mine after tax, border disputes www.ft.com

Mining giant Rio Tinto has halted shipments of copper concentrate from its giant Oyu Tolgoi copper mine following a week-long dispute at the border crossing to China and a new tax bill from the Mongolian government.

China's economy grows by 6.9% in 2017 www.bbc.com

China's economy grew by 6.9% in 2017 according to official data - the first time in seven years the pace of growth has picked up.

The figure beats Beijing's official annual expansion target of about 6.5%.

China is a key driver of the global economy and so the better-than-expected data is likely to cheer investors around the world.

But many China watchers believe the GDP numbers are much weaker than the official figures suggest.

This month alone, the governments of Inner Mongolia and of the large industrial city of Tianjin have admitted their economic numbers for 2016 were overstated.

Taking the figures at face value, the 2017 growth rate is China's highest in two years. And it represents the first time the economy has expanded faster than the previous year since 2010.

However as Beijing ramps up efforts to reduce risky debt and to increase air quality, analysts said this may impact 2018 growth.

The numbers released on Thursday also showed that in the last three months of 2017, the economy grew at an annual rate of 6.8% - slightly higher than analysts had been expecting.

First, it looks like stronger exports - as the world economy picked up - and the final sputter of (another) government infrastructure investment spurt helped make 2017 better than expected.

But that's the model China is trying - gently - to get away from.

Second, is it true?

China's figures can be so stable, so in line with government targets, that it's hard to really believe them.

In the run up to these figures being published there's also been an unusual spate of honesty from several provincial governments, who've admitted faking their GDP or fiscal figures. All of which fed into the national picture.

China's debt has risen significantly in recent years, with worrying numbers around local government loans, corporate and household debt and non-performing bank loans.

The International Monetary Fund (IMF) said recently that the country's debt had ballooned and was now equivalent to 234% of the total output. It said Beijing needed to concentrate less on growth and instead help improve banks' finances, among other efforts.

Beijing meanwhile says it has been taking steps to contain risky debt despite the impact that might have on economic growth - efforts the IMF said it recognised.

The government has promised to continue tackling local government debt, among other efforts, and on Thursday vowed to help state-owned enterprises "leverage and cut debt ... and to repay their bonds on time this year".

China's strict anti-pollution measures, which were introduced across 28 cities last year, are also expected to hurt economic growth in the short term.

The measures have included shutting down or cutting back production at factories in heavy industry like cement and steel.

Households have also been asked to switch to natural gas and electricity from coal, in an effort to curb pollution.

However this policy left millions without proper heating, and so was temporarily abandoned in December.

Chinese officials have said Beijing's air quality improved sharply in the winter of 2017 and heralded their efforts as a "new reality" for the country.

Speaker of Parliament to visit Vietnam www.news.mn

The Chairman of the State Great Khural (parliament) of Mongolia M.Enkhbold and his spouse will make an official visit to Vietnam from 20 to 23 January.

Rio Tinto hits more turbulence in Mongolia as protests halt copper exports www.afr.com

Rio Tinto has hit more turbulence in Mongolia, with blockades near the Chinese border stopping Rio's Oyu Tolgoi mine from delivering copper to customers.

China no longer wants Western garbage www.rt.com

The European Union (EU) has announced its first-ever Europe-wide strategy on plastics recycling. It followed China’s ban on imports of waste from Western countries.
All plastic packaging in the European market will be recyclable by 2030, said the EU Commission in a press release. The consumption of single-use plastics will be reduced and the intentional use of microplastics will be restricted, it added.

Competitiveness report shows decline in governance performance www.montsame.mn

Ulaanbaatar /MONTSAME/ The Economic Policy and Competitiveness Research Center’s annual report on the Competitiveness of Provinces was released on January 17, showing decline in several indicators.

MRPAM discloses prospective exploration projects www.gogo.mn

Mineral Resources and Petroleum Agency of Mongolia (MRPAM) presented 13 prospective projects in the mining industry. One-third of the projects consist of major gold deposits and the others include projects on tungsten-molybdenum, copper, rare-earth elements, lithium and uranium.