This situation, coupled with previously pro-cyclical policies and a fragile external position, are key credit challenges. Over the longer term, reducing the susceptibility of the economy and public finances to sharp cyclical swings will rest partly on the success of economic diversification initiatives, an aspect of Mongolia's IMF programme.

Moody's conclusions are contained in its annual report on Mongolia's credit profile, which looks at economic strength, low (+); institutional strength, very low (+); fiscal strength, very low (-); and susceptibility to event risk, high (+), the four main analytic factors in Moody's Sovereign Bond Ratings methodology.

The economy has benefited from an upturn in commodity prices in 2017, as well as higher investment growth at some of the country's large mining sector projects, and Moody's expects real GDP growth to accelerate to 4.2% in 2017 and 4.3% in 2018, a significant improvement on 1.0% in 2016.

Given the improved macroeconomic backdrop and commodity prices, the near-term fiscal and growth targets originally set under the country's IMF's programme have been surpassed. Meanwhile, the recent refinancing of external debt obligations has relieved pressure on government liquidity and the country's external position.

However, while gross borrowing requirements and external vulnerabilities are lower than Moody's had envisaged at the start of the year, they remain elevated.

Moreover, significant progress towards achieving structural benchmarks under the IMF programme, aimed at reducing Mongolia's tendency to fall into boom-bust cycles, will only become clear over time.

Upward pressure on the rating could emerge if the government implements fiscal consolidation measures that put government debt on a steady downward trend. These developments would be accompanied by a material rebound in international reserves and increased certainty over the government's lasting ability to meet public sector debt repayments.

Conversely, the rating could come under additional downward pressure if the government's ability to service its debt declined or it faced challenges in rolling over maturing debt. Continued pressure on foreign exchange reserves could also lead to a negative rating action. These risks would be likely to arise if the government failed to secure sufficient or sustained support from multilateral and bilateral donors.