Fitch Ratings-Hong Kong/London-01 February 2021: The appointment of a new prime minister, Luvsannamsrai Oyun-Erdene, on 27 January from within the ruling Mongolian People’s Party (MPP), and the quick formation of a new cabinet signal that the sudden collapse of the previous administration will not compromise economic policy continuity or the near-term growth outlook, says Fitch Ratings.

The resignation of the previous prime minister following protests in the capital, Ulaanbaatar, over the government’s handling of the coronavirus pandemic highlights the fragile hold that recent administrations have had on power, with four prime ministers over the last five years. Nonetheless, Mongolia’s recurring bouts of political volatility are captured in the current ‘B’/Stable rating, which we affirmed in May 2020. Recent developments also appear unlikely to affect access to financing from multilateral and bilateral creditors, which has provided an important cushion during the pandemic.

The political changes could have a greater impact on sovereign creditworthiness if they result in a shift in the government’s policy approach towards strategic mining projects, such as the massive Oyu Tolgoi (OT) copper-gold mine. In affirming Mongolia’s rating in May, we indicated political instability sufficient to significantly disrupt strategic mining projects or FDI as a factor that could contribute to negative rating action.

Media reports suggest the recently re-appointed Minister of Justice and Internal Affairs had previously pushed for amendments to the financing and development agreement for OT, in which the government is a minority shareholder. However, the new prime minister has yet to take a formal position on the matter. Relations between the government and the mine’s major investor, Rio Tinto (A/Stable), have long been fractious, and an approaching presidential election, due on 9 June, appears likely to provoke further calls to revisit the project’s commercial terms.

Our assumption remains that the government will proceed with caution, seeking to avoid significant disruptions to the mine’s development that would have severe implications for Mongolia’s near-term macroeconomic stability. We also believe Rio Tinto will proceed in a similar fashion, given the considerable investment it has already made in the country. The new prime minister previously headed the government’s Oyu Tolgoi working group, and Rio Tinto appointed a Mongolian as Copper Chief Executive in January.

The protests were fuelled by dissatisfaction with the government’s heavy-handed approach to social distancing measures, including border closures that have left many Mongolian nationals stranded overseas, as well as calls for greater economic relief. Mongolia’s case levels remain comparatively low, but control measures were tightened in late-2020 after the discovery of locally transmitted Covid-19 infections, which has further dampened economic activity.

An upturn in mineral exports has served to offset the negative impact on domestic demand, as China’s imports of Mongolian coal and copper have ramped up in line with its investment-driven recovery. Mongolian exports fell by 28.2% yoy in 1H20, amid temporary restrictions on shipments as part of virus containment efforts, but recovered sharply in 4Q20.

We expect strong export growth to continue through 1H21, owing largely to base effects, but sequential demand from China is likely to ease later in the year as the authorities there pare back fiscal stimulus measures. Combined with a recovery in domestic activity, we forecast this will push GDP growth in Mongolia to 6.1% in 2021, following an estimated contraction of 5.2% in 2020.

Mongolia remains vulnerable to external shocks in light of its narrow economic base, heavy reliance on external funding, and low foreign-reserve buffers. However, near-term external risks have declined after the issuance of a USD600 million sovereign bond in late-September. Foreign reserves stood at USD4.5 billion at end-December, against approximately USD2.4 billion in sovereign external debt maturities over 2022-2023.

Contact:

George Xu

Associate Director, Sovereigns

+852 2263 9629

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central, Hong Kong

Andrew Fennell

Senior Director, Sovereigns

+852 2263 9925

Oliver Schuh

Senior Director, Corporates

+44 20 3530 1263

Duncan Innes-Ker

Senior Director, Fitch Wire

+852 2263 9993

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com

Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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