Fitch Ratings - Hong Kong - 15 May 2023: Fitch Ratings has affirmed Mongolia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

Strong Growth, External Vulnerabilities: Mongolia's ratings are underpinned by favourable medium-term growth prospects and high per capita income relative to 'B' rated peers. The ratings are constrained by the country's high reliance on external funding and commodity exports to China amid high external debt and low foreign-exchange reserves. Mongolia scores well on World Bank Governance Indicators relative to 'B' peers, but has suffered from political volatility around issues of resource nationalism.

Growth Rebound: We forecast real GDP growth of 5% in 2023, similar to 2022, on stronger mining activity and steady domestic demand. Growth will likely accelerate in 2024. Coal exports are rebounding after China's removal of border pandemic controls. Export capacity will rise further once cross-border rail links become fully operational in the next one-two years. The strategic Oyu Tolgoi copper mine's underground phase started production in March 2023, although most of the volume gains will only come from 2025. Other mining and infrastructure projects could support medium-term growth.

External Finances Stabilising: The export rebound is helping rein in the current account deficit (CAD), which we expect to shrink to about USD1.7 billion-1.8 billion (about 9% of GDP) in 2023-2024, from about USD2.3 billion (over 13% of GDP) in 2022. We expect inflows of FDI to cover the CAD. Official foreign-exchange (FX) reserves recovered to USD3.7 billion in April 2023, from a trough of USD2.7 billion in August 2022, while bank deposit dollarisation stabilised at 37% of total deposits in March 2023, having risen from 24% at end-2021.

External Finances Remain Precarious: Net external debt, at 160% of GDP in 2023 will be around 6x the 'B' median, although over 30% of this is intercompany lending (FDI), and over 20% is the government's bilateral and multilateral loans on concessional terms, both of which we expect will continue to be stable sources of funding. Reserve coverage ratios, though improved, remain weaker than the 'B' median. Gross reserves are supported by about USD1.7 billion in swap liabilities to the People's Bank of China, which we expect to be rolled over, and similar amounts of FX liabilities to domestic banks.

Maturity Management: Just over USD150 million in government external debt is due in the rest of 2023, with the proceeds of a USD650 million issuance in January mostly used to repay and exchange bonds maturing in May. The Development Bank of Mongolia (DBM) has set aside reserves to repay a JPY30 billion (USD220 million) government-guaranteed bond in December. The government is authorised to guarantee DBM bonds maturing in October (about USD437 million outstanding), which we assume will be used to roll them over. Government external debt maturities in 2024 are USD680 million.

Narrow Fiscal Deficit: We forecast general government fiscal deficits at under 1% of GDP in 2023-2024, after a surplus of 1% of GDP in 2022, reflecting our expectation that higher spending will offset the boost to revenue from the mining sector and inflation. Last year's fiscal outturn marked a significant turnaround from the 3% of GDP deficit in 2021. The government originally budgeted a deficit of under 2% of GDP in 2023, but has since raised its projection for mining revenue by over 1% of GDP.

Underlying Fiscal Stance Expansionary: We estimate that the non-mineral primary deficit will remain at around 11%-12% of non-mining gross value-added (GVA), down from 21% in 2020, but 4pp-5pp worse than in 2017-2019, largely a result of increases to pensions and child support payments legislated in a 2022 supplementary budget, costing over 3% of GDP (5% of non-mining GVA). In our view, there are no credible fiscal anchors, and impetus for fiscal consolidation will be limited in the run-up to legislative elections in June 2024.

Commodity Dependence, Risks: The outlook for external finances is highly sensitive to commodity revenues, which account for 90% of total external receipts and 30% of government revenue. For example, a 10% shortfall in coal volume relative to our baseline would imply a USD500 million (4% of GDP) hit to the CAD in 2023 and a USD100 million hit to government revenue.

Debt Declining; Sizeable Contingent Liabilities: Government debt edged down to 60% of GDP in 2022 from about 61% of GDP in 2021 on strong nominal growth and an improved fiscal balance. We expect debt to continue on a downward path broadly in line with the 'B' median, reaching about 55% of GDP by 2024, including DBM debt assumed to be rolled over with a government guarantee. However, the government has significant potential contingent liabilities, including unguaranteed state-owned enterprise debt of over 15% of GDP and the Bank of Mongolia's (BOM) negative equity position of about 7% of GDP.

Inflation Peaking; Monetary Stance Mixed: We expect headline inflation to average 12% yoy in 2023, from an average of over 15% in 2022, before moderating to 9% in 2024, slightly above the BOM's 4%-8% target. Full normalisation of trade with China and lower global commodity prices should exert a downward pull on inflation, although international sanctions on Russia are still leading to elevated import costs.

The BOM raised its policy rate to 13% in December, bringing cumulative hikes in 2022 to 700bp. However, the impact of this could be blunted by nearly MNT3 trillion (6% of GDP) in liquidity injections from the redemption in central bank bills in 2022. Government-approved customs exemptions for diesel and gasoline imports in 2Q23 appear to run contrary to the BOM's moves to tighten policy.

Banking System Stable: Non-performing loans have remained steady at about 10% of total sector loans, although underlying asset quality issues may be masked by high nominal growth, ongoing subsidised lending programmes and a moratorium on mortgage repayments, which only ended in December 2022. The BOM completed an asset quality review of domestic systemically important banks (D-SIBs), and three of the five D-SIBs have already launched IPOs to reduce shareholder concentration, meeting a BOM requirement to do so by June 2023.

ESG - Governance: Mongolia has an ESG Relevance Score of '5[+]' for Political Stability and Rights and '5' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. Mongolia has a medium World Bank Governance Indicator ranking at the 47th percentile.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

- External Finances: Heightened external stress, which may be evident from restricted access to external-financing sources or a marked decline in foreign reserves.

- Public Finances: Significant increase in the budget deficit or the government debt/GDP ratio.

- Structural Features: Political instability and/or major policy shifts sufficient to significantly disrupt strategic mining projects or FDI inflows.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

- External Finances: The accumulation of larger foreign-currency reserve buffers and the implementation of a debt-management strategy that lowers refinancing risks and improves external debt sustainability.

- Macroeconomic: Strong and sustained economic growth and export without the emergence of imbalances, and the maintenance of a favourable business environment conducive to robust FDI inflows.

- Public Finances: Sustained reductions in the government debt/GDP ratio.

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns Mongolia a score equivalent to a rating of 'B+' on the Long-Term Foreign-Currency (LT FC) IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM score to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

- Structural: -1 notch, to reflect lingering risk of political volatility around issues of resource nationalism, which could negatively impact foreign investment and mining sector exports.

- Macro: +1 notch, to reflect Mongolia's strong medium-term growth prospects, which are not fully reflected in the current SRM output and are stronger than that of peers.

- External Finances: -1 notch, to reflect Mongolia's vulnerability to external shocks, given its dependence on commodity exports to China, as well its high external financing needs and debt in the context of relatively low foreign-exchange reserves.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Mongolia has an ESG Relevance Score of '5[+]' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Mongolia has a percentile rank above 50 for the Governance Indicator, this has a positive impact on the credit profile.

Mongolia has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Mongolia has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.

Mongolia has an ESG Relevance Score of '4[+]' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Mongolia has a percentile rank above 50 for the Governance Indicator, this has a positive impact on the credit profile.

Mongolia has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Mongolia, as for all sovereigns. As Mongolia has a record of more than 20 years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg.

With the Government of Mongolia declaring 2023 through 2025 the “Years to Visit Mongolia”, “Mongolia-Japan Tourism Forum-2023” is taking place in Tokyo, Japan on May 15-16 to revive the tourism sector in the post-pandemic era and expand the cooperation between the countries in this sector, bringing together over 100 Mongolian and Japanese tour operators’ representatives.

Opening remarks were delivered by Adviser to the Minister of Environment and Tourism O. Odbayar, Ambassador Extraordinary and Plenipotentiary of Mongolia to Japan D. Batjargal, and Chair of Toa Research Institute Takebe Tsutomu.

In his address, O. Odbayar, Adviser to the Minister of Environment and Tourism, emphasized the importance of organizing the Forum in strengthening business ties between the two countries, opening up new areas and opportunities for trade, investment, and cooperation, and attracting investment from large Japanese companies to Mongolia.

As part of the “Years to Visit Mongolia”, our country plans to receive 100 thousand tourists from Japan.

During the Forum, T. Monkh-Od, the Head of the Tourism Policy and Coordination Department of the Ministry of Environment and Tourism, gave a presentation on the policy and future activities of the Government of Mongolia in the tourism sector and the Mongolian airliane companies, MIAT and Air Mongolia, and "Juulchin", a tour company, presented their offerings to tourists.

Newcrest Mining Ltd. has agreed to a takeover deal with Newmont Corp. worth about A$28.8 billion ($19.2 billion) to create the world’s biggest gold producer.

Newcrest shareholders will get 0.4 shares in Newmont for every Newcrest share they own, giving them 31% ownership of the combined group, the Melbourne-based company said Monday, confirming a Bloomberg News report Sunday.

The deal gives Newcrest an implied enterprise value of A$28.8 billion, which includes net debt.

Newcrest will also pay a franked special pre-completion dividend of up to $1.10 per share. Newcrest had earlier agreed to extend Newmont’s due-diligence rights to May 18 after an earlier deadline lapsed, it said Thursday.

“This transaction will combine two of the world’s leading gold producers, bringing forward significant value to Newcrest shareholders through the recognition of our outstanding growth pipeline,” Newcrest’s chairman, Peter Tomsett, said in the statement.

The enlarged Newmont will have gold assets in North and South America, Africa, Australia and Papua New Guinea. It will also expand its exposure to copper, a key metal in the clean energy transition.

A deal would likely mark the apogee of a furious five-year consolidation among the world’s largest gold miners that began with Barrick Gold Corp.’s $18 billion pursuit of Randgold Resources Ltd. and includes a $5.2 billion takeover of Yamana Gold Inc. that was completed in March. Newmont’s proposal comes just weeks after the spot trading price of bullion approached an all-time record amid a global stagflation watch.

Newmont first approached its Australian rival in February with a $17 billion non-binding bid that was rejected by Newcrest’s board. The US company sweetened that in April to $19.5 billion, and described it as the best and final offer. Newcrest chief executive officer Sherry Duhe said the board was prepared to recommend the proposal to its shareholders, subject to successful due diligence.

Gold miners worldwide are facing the prospect of stagnating production, harder-to-mine deposits and rising input costs. Such industry challenges are seen as a catalyst for more mergers and acquisitions, as companies seek to increase size to boost production and improve efficiencies through economies of scale.

It’s not just Newcrest’s five gold mines across three continents that are attracting Newmont, as the Australian company generates around a quarter of its revenue from copper. Newmont, in turn, is facing a decade-long gold rut and has said it wants more of the energy-transition metal in its portfolio.

(By Harry Brumpton and Dinesh Nair, with assistance from Jason Scott)

At the invitation of the Deputy Prime Minister and Minister of Foreign and European Affairs of the Republic of Slovenia Tanja Fajon, Minister of Foreign Affairs of Mongolia B. Battsetseg is on a Visit to the country on May 15-16.

Within the framework of the Visit, the Minister of Foreign Affairs B. Battsetseg will pay courtesy calls on the President and the President of the National Assembly of the Republic of Slovenia and hold official talks with Tanja Fajon, the Deputy Prime Minister and Minister of Foreign and European Affairs. Issues on enriching the relations and cooperation between Mongolia and Slovenia with trade and economic content and increasing the investment are expected to be covered during the meetings.

As part of the Visit, Minister B. Battsetseg will attend the Diplomatic Conference on the Draft Convention on International Cooperation in the Investigation and Prosecution of Genocide, Crimes against Humanity, War Crimes and Other International Crimes, which is being held in Ljubljana, Slovenia between May 15 and 26, as an honored guest.

Diplomatic relations between Mongolia and the Republic of Slovenia were established on February 18th of 1993, marking the 30th anniversary this year.

Mongolians in some areas will have to prepare for cold showers as hot water will be restricted starting from the 15th of this month. The announcement was made by the central heating company in Mongolia, Ulaanbaatar, which provides hot water and heating to households and businesses in the capital city.

According to the announcement, the hot water restriction will affect several districts in Ulaanbaatar, including Songinokhairkhan, Bayanzurkh, and Khan-Uul, as well as some parts of the city center. The restriction is due to maintenance work being carried out on the heating system, which will take approximately one month to complete.

The decision to restrict hot water has caused concern and frustration among the residents of the affected areas, especially as Mongolia is currently experiencing cold weather conditions. Some have criticized the timing of the maintenance work, arguing that it should have been done during the summer months instead.

The central heating company has assured residents that it will do its best to minimize the impact of the restriction by providing alternative sources of hot water, such as water trucks and public bathhouses. However, some have expressed doubt about the effectiveness of these measures and have called for more proactive solutions.

As the hot water restriction takes effect, residents are being urged to conserve water and take measures to stay warm during the cold weather. It is important to note that while the restriction may be inconvenient, it is necessary for the maintenance and improvement of the heating system in the long run.

Impact on Residents

The hot water restriction in some parts of Ulaanbaatar is expected to have a significant impact on residents, particularly during the cold weather conditions in Mongolia. Many households rely on hot water for basic daily activities such as cooking and cleaning, as well as for bathing and staying warm.

The restriction has caused concern and frustration among residents, who are calling for more proactive solutions to address the issue. The central heating company has assured residents that it will provide alternative sources of hot water, but some remain skeptical about the effectiveness of these measures.

As the restriction takes effect, it is important for residents to conserve water and take measures to stay warm. This includes using alternative sources of heating and insulation, as well as reducing water usage where possible.

The Importance of Maintenance

While the hot water restriction may cause inconvenience for residents, it is important to remember that maintenance work is necessary to ensure the efficient and safe operation of the heating system. Neglecting maintenance can lead to serious problems and even safety hazards in the long run.

The central heating company has stated that the maintenance work will take approximately one month to complete, and the hot water restriction is necessary to facilitate this process. As such, it is important for residents to cooperate and conserve water during this time to minimize the impact of the restriction.

It is also important for authorities and the central heating company to communicate clearly with residents about the maintenance work and its impact on their daily lives. This will help to ensure that residents are prepared and can take appropriate measures to minimize the inconvenience caused by the restriction.

BY:

Mamoon Alvi serves as an integral part of our global newsroom team. With a strong background in international news from his time at both BOL TV and Dharti TV, he came on board at BNN well-prepared to contribute. Mamoon's unwavering dedication to journalism drives him to relentlessly pursue the truth and deliver crucial stories to audiences around the world.

Design and survey work on the transit gas pipeline through Mongolia is at the final stage, Gazprom has noted following a meeting of the joint working group with the Mongolian government.

Gazprom reported that a meeting of the working group to implement the memorandum on the project to supply gas via pipeline from Russia to China through the territory of Mongolia was held in Ulaanbaatar under the leadership of Deputy Chairman of the Executive Board Vitaly Markelov and Mongolian Deputy Prime Minister S.Amarsaikhan.

“Participants at the meeting discussed the progress of the design and survey work on the construction project of the Soyuz Vostok gas pipeline. It was noted that the work is being carried out in full accordance with the approved plans and is at the final stage,” according to the press release.

Gazprom plans to construct a gas pipeline with capacity of 50 billion cubic meters through Mongolia to China. According to the feasibility study, the pipeline route in Mongolia will be 962.9 km in length, the pipe diameter will be 1400 mm, and five compressor stations are envisaged.

Gazprom and the Mongolian government in January 2022 signed a protocol on the results of the consideration of a feasibility study for constructing the Soyuz Vostok gas pipeline. The Soyuz Vostok Gas Pipeline special-purpose company prepared the feasibility study.

The respective parties in February 2022 signed an agreement on completing the design and survey work as part of the project, as well as an activity plan for the joint working group for 2022-2024.

The Financial Regulatory Commission (FRC) held its regular session on May 12 and decided to register ordinary shares of "Khas Bank" LLC and "Trade Development Bank" LLC for public offering.

As a result of the registration of the shares offered by the abovementioned two banks, all major banks have now completed the registration process of their shares as required by the Banking Law.

The successful fulfillment of the provisions outlined in the Banking Law, pertaining to the conversion of five influencial banks of the system into open joint-stock companies within the prescribed timeline, is indication of the effective implementation of the banking reform.

Consequently, the market value of shares is expected to grow with an increase in new highly liquid financial instruments and the enhanced engagement of foreign and domestic investors. Moreover, banking operations are also expected to become more transparent and open, enabling the creation of long-term financing sources and fostering a multi-pillar financial system.

North China's Inner Mongolia Autonomous Region saw robust foreign trade growth in the first four months of 2023, according to the customs authorities in Hohhot, capital city of the region.

The region's total import and export value hit 60.77 billion yuan (about 8.73 billion U.S. dollars) from January to April, up 45.1 percent year on year.

Exports rose 26.6 percent to 23.38 billion yuan, while imports soared 59.6 percent to 37.39 billion yuan.

The region's private enterprises also saw rapid growth in foreign trade volume, increasing by 67.9 percent year on year during the period to 47.29 billion yuan.

The Erenhot Port, the largest land port between China and Mongolia, has made great contribution to the region's foreign trade. As of May 3, the port had handled a total of 1,042 China-Europe freight trains, up 7 percent year on year.