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Fitch: Mongolia IMF Review Delay Has No Immediate Rating Impact www.reuters.com

HONG KONG/SINGAPORE, September 20 (Fitch) The IMF's postponement of its late-September Board discussion on Mongolia's external financing package will delay disbursement of bailout funds, testing investor confidence and raising refinancing risks for the government, says Fitch Ratings. However, the delay is unlikely to extend significantly beyond year-end and should not affect the country's ability to meet near-term debt repayments. It therefore has no immediate ratings implications. The postponement of the Board meeting follows the ousting of the prime minister and cabinet in a no-confidence parliamentary vote on 7 September, which has been attributed to the ruling Mongolian People's Party's (MPP) loss of the presidential election to an opposition Democratic Party candidate in July. It was this outgoing administration that agreed to the terms of Mongolia's IMF-led three-year Extended Fund Facility (EFF), which was approved in May 2017. Disbursement of USD38 million from the IMF tied to completion of the first review will be withheld, along with some components of the financing from other international partners, until the IMF can discuss economic prospects and policies with the new government. Fitch views the delay of the Board meeting as relatively standard IMF protocol under the circumstances of heightened political uncertainty, needed to provide assurances that the incoming administration will be committed to the terms of the EFF. Early adherence to the conditions appears to have been strong. The IMF announced on 2 August a staff-level agreement on completion of the first review of the EFF, and stressed that performance had been good, with "all quantitative targets on track". In particular, it noted progress on structural reform and outperformance on fiscal metrics. In the meantime, the economy is rebounding - GDP growth accelerated to 5.3% yoy in 2Q17, from 1% in 2016. The government also recently appointed an auditor for an asset-quality review of the banking sector, which we expect to proceed. We expect the new administration to maintain policy continuity with the outgoing leadership and to remain committed to the IMF programme, given that parliament is heavily tilted in favour of the MPP, which holds 65 of 76 seats. A new candidate for prime minister is likely to be proposed by the MPP shortly, and to be confirmed by parliament following consultation with the president within the deadline of 6 October. The Ministry of Finance has sought to allay investor concerns by emphasising broad government backing for the IMF programme in a statement released on 19 September, stressing that "Mongolia continues to support the implementation of the IMF programme in full". The new leadership will face strong incentives not to change policy direction or break from the IMF, as either could risk shutting Mongolia out of external debt markets ahead of a USD500 million bond maturity in January 2018. Such a prospect would significantly increase the near-term probability of a sovereign default, given the country's low foreign reserve buffers (USD1.4 billion) and dependence on external capital markets for fiscal funding. Mongolia is particularly vulnerable to swings in investor sentiment, as a considerable portion of government borrowing is in the form of external marketable debt. Mongolia's sovereign rating has been downgraded twice since late 2015, as uneven economic policy has put pressure on public and external finances. The current rating of 'B-'/Stable factors in continuing IMF support, and assumes that the delay in the disbursement of IMF funds will not affect the bond repayment due in January 2018.



Published Date:2017-09-21