Singapore, February 14, 2023 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Mongolia's long-term B3 issuer and foreign currency senior unsecured bond ratings and maintained the stable outlook. The short-term issuer ratings are affirmed at Not Prime.

Mongolia's B3 rating balances elevated liquidity and external risks against strong growth prospects, as well as a debt repayment profile that has settled at more sustainable levels compared to the past. Following a recent sovereign debt refinancing transaction, Mongolia's financing needs for the next few years have diminished to more manageable, albeit still high, levels. Moreover, the recent relaxation in China's COVID policies, coupled with continued progress on Mongolia's infrastructure and logistics networks and the development of major mining projects will support a gradual recovery in foreign currency revenue and allow GDP growth to rise to potential rates over the next few years. At B3, the credit profile also incorporates institutional weaknesses and a lack of economic diversity that raises volatility in growth and fiscal outcomes.

The stable outlook is premised on the view that external liquidity risks will remain elevated but manageable. While financing pressures may spike at various junctures given Mongolia's sizeable market debt obligations through to the end of 2026, Moody's expects that the government will continue to have access to markets at costs that are not prohibitive, containing probable risks of a credit event to levels consistent with a B3 rating.

Mongolia's local-currency country ceilings remain at B1. The two-notch gap to the sovereign rating reflects a large government footprint in the economy, high commodity reliance in overall revenues, and still-high external imbalances. The foreign-currency country ceiling remains at B3, representing a two-notch gap to the local currency ceiling, to take into consideration Moody's assessment of weak policy effectiveness and high external debt that point to transfer and convertibility risks at times of heightened external vulnerability.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx... for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RATIONALE FOR THE STABLE OUTLOOK

FUNDING PRESSURES HAVE ABATED FROM ELEVATED LEVELS AND WILL REMAIN MANAGEABLE

Moody's expects Mongolia will retain adequate market access that together with continued access to bilateral and multilateral funding will allow it to meet upcoming financing requirements. Mongolia's liquidity and external funding challenges have begun to abate since the end of 2022, and foreign exchange reserves have gradually recovered on the back of improvements in exports and trade credit inflows, as well as one-off inflows such as principal repayments on project financing loans by Oyu Tolgoi, Mongolia's largest copper mine. Moreover, a debt refinancing exercise conducted at the start of 2023 has materially reduced the maturities due in 2023 and 2024.

Following significant logistics disruptions related to China's zero covid policy, exports improved considerably in December, buoying foreign reserves. Looking ahead, the end of border disruptions and an accelerated pace of recovery in the Chinese economy will support export growth, although Moody's anticipates that in nominal terms export growth will slow as commodity prices moderate, even as import growth remains strong.

In mid-January, the government issued a $450 million bond, alongside the launch of a tender and exchange offer of $200 million. Investors who participated in the tender and exchange had outstanding 2023 or 2024 bond maturities replaced at par value by cash or new bonds maturing in 2028. Following this, the government's Eurobond maturities are reduced to $82 million in 2023 and $390.7 million in 2024.

While the refinancing exercise has reduced the government's direct borrowing requirements, outstanding maturities by the Development Bank of Mongolia LLC (DBM, B3 stable), which is entirely owned by the government, remain, including a JPY30 billion ($231 million) government-guaranteed samurai bond due in December 2023 and a $500 million bond maturing in October 2023. Funding for the samurai bond has been secured by DBM. However, Moody's expects that ongoing financial difficulties linked to DBM's high loan loss rates on problem assets indicate a strong likelihood that government support will be required to meet at least part of DBM's October 2023 bond maturity, even though the bond is not backed by a government guarantee.

Under these assumptions, Moody's estimates the sovereign's gross borrowing requirements at 12.8% of GDP in 2023, which will entail the government seeking additional financing for the year, potentially from market sources. While global funding conditions remain tight, Mongolia's recent bond offering demonstrates a level of market access that supplements other funding sources, such as those supported by its close engagement with international financial institutions.

As a result, Moody's estimates foreign exchange reserves will remain broadly stable at around $3.1 billion at the end of 2023 from $2.9 billion in December 2022. Coupled with the extended repayment schedule, this will result in Moody's External Vulnerability Indicator (EVI), which measures the ratio of maturing external debt to reserves, at 227% in 2023 and 211% in 2024. Although reserve adequacy has stabilized, Moody's assesses that Mongolia's EVI remains a credit constraint at these levels. Continued pressures on the exchange rate and still high inflation driven by core food and energy prices, which has not alleviated even after the debt refinancing exercise, are also reflective of these pressures.

RATIONALE FOR THE B3 RATING

MINING PROJECTS, CONSTRUCTION ON INFRASTRUCTURE SUPPORT GROWTH POTENTIAL

Mongolia's potential growth continues to represent an underlying credit strength. Moody's estimates real GDP growth will increase to 4.5% year-on-year in 2023 from 3.7% in 2022, before gradually rising toward a potential rate of 6-7%. Potential growth remains well supported by demand for copper, which will benefit from ongoing global trends toward decarbonization including the adoption of copper-rich battery electric vehicles.

After a decade of operations, ongoing underground mining operations at Oyu Tolgoi will reach sustainable production of high-grade ore by the first quarter of 2023. Coal production is also likely to remain strong for the near to medium term, supported by demand from China, mainly for steel-making with limited substitution risk. Coal exports will be supplemented by the increase in rail connectivity under the recently operational rail infrastructure projects.

DEBT BURDEN WILL STABILIZE, ALTHOUGH CONTINGENT LIABILITY RISKS REMAIN

Strong nominal GDP growth and revenue performance will support stabilization in fiscal and debt metrics. Fiscal performance markedly improved in 2022 on the back of stronger mineral revenue growth, resulting in the deficit consolidating materially to 1.8% of GDP from 6.5% in 2021. This reverses a sharp widening in the fiscal deficit and a build-up in the debt burden during the pandemic years that unwound fiscal consolidation achieved between 2017 and 2019.

Some support measures, such as the Child Money Program, have acted as a permanent drag on fiscal buffers. However, although Moody's expects the fiscal deficit to widen from recent low levels in 2023 and 2024 to around 5-6% of GDP, strong nominal GDP growth will likely result in the debt ratio consolidating to 56.3% of GDP in 2023, from 60.4% in 2022, with a gradual downward drift over the forecast horizon. This is in line with the B-median of 56% in 2023.

Fiscal strength remains a significant credit constraint for Mongolia. With nearly all the government debt in foreign currency, Mongolia's fiscal strength and credit profile are highly vulnerable to a significant depreciation of the tugrik. Moreover, Moody's assesses that contingent liability risks from state-owned enterprise (SOE) debt will remain material. Recent offtake barter agreements by Erdenes Tavan Tolgoi (the state-owned mining company) illustrate the risks of such liabilities crystallizing on the government's balance sheet, which are magnified by weak governance structures around SOEs.

INSTITUTIONAL WEAKNESSES EXACERBATE VULNERABILITIES TO COMMODITY PRICE CYCLES

Also incorporated in the B3 rating are generally loose, pro-cyclical policies. Although debt and liability management has significantly improved over the years, a tendency toward expansionary fiscal policies remains and is typically heightened during commodity price upswings. In addition, despite some of the laws instituted over past years to strengthen central bank independence, the use of quasi-fiscal exercises still prevails in some respects, particularly in the form of the subsidized mortgage program. Governance and supervisory capacity around state-owned enterprises is also weak – as evidenced by large loan losses at DBM. Finally, recent allegations around 'coal theft' indicate that the heavy concentration of natural resources in the economy, coupled with weaknesses in the institutional framework can manifest in corruption.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Mongolia's ESG Credit Impact Score is highly negative (CIS-4), driven by a high exposure to environmental risks, a moderately negative social risk issuer profile score, and a weak governance profile. A high government debt burden and other immediate liquidity pressures constrain the sovereign's financial capacity to respond to environmental and social risks.

Mongolia's exposure to environmental risks is highly negative (E-4 issuer profile score), related to an economy that is highly dependent on the production and exports of hydrocarbons, with implications for waste and pollution levels. Mongolia is also vulnerable to water scarcity driven by mineral extraction, deforestation, and desertification.

Exposure to social risks is moderately negative (S-3 issuer profile score). The uneven distribution of incomes, is balanced by a young population coupled with a strong social safety net that has enhanced the provision of health and education benefits.

Mongolia has a highly negative governance profile score (G-4 issuer profile) reflecting weak executive institutions and policy effectiveness against ongoing structural reforms.

GDP per capita (PPP basis, US$): 12,585 (2021) (also known as Per Capita Income)

Real GDP growth (% change): 1.6% (2021) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 13.8% (2021)

Gen. Gov. Financial Balance/GDP: -6.5% (2021) (also known as Fiscal Balance)

Current Account Balance/GDP: -13.4% (2021) (also known as External Balance)

External debt/GDP: 215.4% (2021)

Economic resiliency: b1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 09 February 2023, 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 institutions and governance strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO AN UPGRADE

The rating would likely be upgraded upon evidence of a sustained build-up in the foreign exchange liquidity buffer supported by non-debt creating inflows, that alleviate external liquidity risks from sizeable debt obligations. A consistently falling debt burden accompanied by steady improvements in debt affordability would alleviate fiscal constraints and drive upward rating momentum. These indications would likely relate to improvements in the management of domestic public finances, containing the government's funding requirements and the economy's external financing needs. Efforts towards gradually diversifying the economy away from its reliance on commodities that reduce growth volatility and susceptibility to boom-bust economic cycles would also be credit positive.

FACTORS THAT COULD LEAD TO A DOWNGRADE

A rating downgrade could transpire from widening gross borrowing requirements significantly above our baseline assumptions, and/or rising government liquidity risks that point to difficulties in meeting these borrowing needs. Persistent external financing gaps that threaten macroeconomic stability would also exert downward rating pressures. A sustained shock to growth, for instance through the derailment of large mining projects, would also be a trigger for downward rating action.

The principal methodology used in these ratings was Sovereigns published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/395819. Alternatively, please see the Rating Methodologies page on https://ratings.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.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx... for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Endorsement

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Anushka Shah

VP - Senior Credit Officer

Sovereign Risk Group

Moody's Investors Service Singapore Pte. Ltd.

71 Robinson Road #05-01/02

Singapore, 068895

Singapore

JOURNALISTS: 852 3758 1350

Client Service: 852 3551 3077

Gene Fang

Associate Managing Director

Sovereign Risk Group

JOURNALISTS: 852 3758 1350

Client Service: 852 3551 3077

Releasing Office:

Moody's Investors Service Singapore Pte. Ltd.

71 Robinson Road #05-01/02

Singapore, 068895

Singapore

JOURNALISTS: 852 3758 1350

Client Service: 852 3551 3077