Singapore, November 18, 2024 -- Moody's Ratings (Moody's) has upgraded the Government of Mongolia's long-term issuer and senior unsecured ratings to B2 from B3. The short-term issuer ratings are affirmed at Not Prime. The outlook remains stable.

The upgrade of Mongolia's ratings to B2 reflects a significant consolidation in its debt burden on the back of an uptick in mineral revenues, combined with an emerging track record of effective debt and fiscal management.

In conjunction with fiscal consolidation, prudent liability management has resulted in debt obligations being successfully refinanced over recent years, thus clearing the maturity schedule until 2026 and alleviating liquidity risks, albeit from high levels.

Strong trends in trade over the last year are also reflected in a build-up in foreign reserve buffers, which are likely to remain around current levels, underpinned by steady export growth. As a result, external vulnerabilities have come off from high levels more recently and should stabilize going forward, although they continue to remain a credit constraint relative to B-rated peers.

The B2 rating reflects Mongolia's susceptibility to commodity price cycles due to its narrowly diversified economic structure, which results in high growth and fiscal volatility. This is balanced by strong growth prospects, backed by structural global demand for copper, which will temper the economy's overall sensitivity to coal demand over time.

Although it is likely that some of the improvements in these metrics could normalize as commodity prices and demand fluctuate, a lengthening track record of effective fiscal and monetary management would continue to support the credit profile. The stable outlook reflects our view that external liquidity risks, while elevated, will remain manageable. Mongolia's sizeable market debt obligations in 2026 are expected to be met with continued market access at non-prohibitive costs, mitigating the probable risk of a credit event consistent with a B2 rating.

Concurrently, we have also raised Mongolia's local-currency country ceilings to Ba3 from B1 previously. 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 is raised to B2 from B3 previously, representing a two-notch gap to the local currency ceiling, to take into consideration the 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 UPGRADE TO B2

DEBT BURDEN TO STABILIZE FOLLOWING SIGNIFICANT CONSOLIDATION

Mongolia's debt ratio has declined from a peak of over 93% in 2016 and to 43% of GDP at the end of 2023. We expect that the debt burden will moderate further at the end of this year, before gradually increasing to 54% by the end of the decade. However, this remains consistent with the median for B1-B2 rated sovereigns between 2025-2030, at 50.7% of GDP.

Debt reduction has been driven by a combination of high nominal GDP growth and debt repayments, whilst new borrowings were limited. Although nominal GDP has been propped by high inflation over 2021-22, real growth has also seen a steady expansion. In addition, the fiscal balance has consolidated: on the back of improved mineral revenues due to a favorable commodity price environment for coal and copper, the fiscal position moved to a surplus in 2023, for the first time since 2018.

We expect that fiscal surpluses will be short-lived, and factors in the balance reverting to a deficit this year. This, coupled with the government's large planned infrastructure program could further add to the debt burden.

Mongolia also has a history of procyclical fiscal policies. Nevertheless, improvements in debt management will likely keep fiscal outcomes within a range comparable to B2 peers. Recent amendments to the government's fiscal responsibility legislation specify the debt ceiling of 60% of GDP in nominal rather than net present value terms, allowing for greater transparency. New rules prioritize concessional funding and mandate a structural fiscal deficit that is limited to 2% of GDP in debt per year. While these measures are too recent to have any visible impact yet, adherence could boost fiscal transparency and limit increases in market debt. Moreover, despite the forecasted upward drift in the debt ratio, it may be less likely that Mongolia will experience a spike in leverage comparable to the previous cycle in 2013, as growth cycles have turned more predictable given structural demand for copper, and as Mongolia enjoys more established financial market access compared to the past, allowing for a smoother refinancing of maturities.

GOVERNMENT LIQUIDITY RISKS HAVE ALLEVIATED, UNDERPINNED BY CLOSER FISCAL POLICY MANAGEMENT

Refinancing risks are materially lower in the medium term. Since 2020, the government has been consistently refinancing upcoming maturities for the year ahead. This is in line with its debt management strategy, that aims to reduce the pressure of the external debt on budget in the long term and lengthen the maturity profile of the debt portfolio. In addition, borrowing requirements have significantly reduced.

Factoring in a wider fiscal deficit and large upcoming maturities, we expect gross borrowing requirements to rise to 11.7% of GDP in 2026, from an estimated 5.4% of GDP 2024. Nonetheless, this is lower both relative to peers as well as to historical trends. These debt obligations should be financed relatively smoothly. The issuance of domestic debt presents another financing option that has not been tapped into in the past but could be met with demand from the banking system and support the building of a yield curve.

HEALTHY GROWTH PROSPECTS REDUCE RISK OF VOLATILITY

Following a very strong growth performance in 2023 where real GDP expanded by 7.1%, we expect trends will moderate to 5.8% this year, before edging higher in 2025. Beyond 2025, growth should average around 6% with the completion of Oyu Tolgoi after it hits sustainable production in 2028 resulting in some normalization in the structural growth trajectory.

Mongolia's exposure to commodities continues to introduce a disproportionate degree of growth volatility. While diversifying its production and export base to other sectors has been a key policy effort, that process has been slow and proceeded incrementally. As Mongolia veers its commodity mix toward copper, this volatility in growth caused by commodity cycles could moderate.

Copper production would be supported by output from the Oyu Tolgoi mine as it moves towards hitting peak production, and copper content improves. Increased production should also be supported by strong demand impetus, driven by organic improvements in living standards, but more importantly by the use of copper in electrification as energy transition goals become predominant, and demand for digital infrastructure –which consumes more electricity – increases. As currently operating copper mines are mature and will face declining ore grades, this puts Mongolian copper in a favorable position to meet global demand.

These trends should support a degree of vertical diversification within the commodities sector.

Meanwhile, exports of coal - Mongolia's largest commodity export - face the risk of a gradual slowdown in demand in the long run, due to slower growth in China and global efforts toward carbon transition. Nonetheless, agencies such as the International Energy Agency still project relatively stable coal demand in the near term, particularly for coking coal, which is used primarily for steel-making. Mongolia's competitive pricing, strong ash content, and better connectivity to China would likely underpin this demand.

Another focus area for Mongolia has been to leverage its critical mineral resources, as well as diversifying to other sectors such as agriculture, tourism, and renewable energy.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook is premised on the view that external liquidity risks will remain at elevated, albeit manageable levels. While financing pressures may spike at various junctures given Mongolia's market debt obligations, and the fiscal deficit will widen as spending pressures persist and mineral revenues normalize, this is balanced by our expectation that the government will continue to have access to markets at costs that are not prohibitive, containing risks of a credit event to levels consistent with a B2 rating. While growth performance should remain strong in 2025, it is subject to downside risks from slower growth in China, Mongolia's largest trading partner.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Mongolia's ESG credit impact score is CIS-4, driven by high exposure to environmental and governance risks. The sovereign also has moderate exposure to social risks. The CIS-4 score indicates that the rating is lower than it would have been if ESG risk exposures were not present.

Mongolia has high exposure to environmental risks (E-4 issuer profile score), reflecting an economy that is highly dependent on the production and export of hydrocarbons, particularly coal, which leaves the sovereign susceptible to carbon transition risk. The nature of the coal-based economy coupled with continued urbanization has also resulted in waste and pollution levels, particularly air pollution. Mongolia is also vulnerable to water scarcity driven by mineral extraction, overgrazing, deforestation and desertification. These risks are driven by mining and urbanization, and have threatened the livestock sector.

Exposure to social risks is moderate (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. However, access to basic services, including drinking water and sanitation, is very weak.

Mongolia has high exposure to governance risks (G-4 issuer profile score) with weak executive institutions and policy effectiveness against ongoing structural reforms. Low fiscal prudence and a tendency to procyclical policies curb the sovereign's financial capacity to respond to environmental and social risks particularly during economic downturns.

GDP per capita (PPP basis, US$): 17,884 (2023) (also known as Per Capita Income)

Real GDP growth (% change): 7.2% (2023) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.9% (2023)

Gen. Gov. Financial Balance/GDP: 1.4% (2023) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.6% (2023) (also known as External Balance)

External debt/GDP: 168.3% (2023)

Economic resiliency: b1

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

On 13 November 2024, 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 economic fundamentals, including its economic strength, have materially increased. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. 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.

Evidence of a lengthening track record of policy prudence, particularly with regard to measures that mitigate a tendency to veer toward procyclical fiscal policies as well as enhanced governance and supervision around state-owned entities, would be credit positive.

A consistently falling debt burden accompanied by steady improvements in debt affordability would also 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.

Progress toward economic diversification away from a reliance on commodities that reduces susceptibility to boom-bust economic cycles would also likely be a trigger for upward rating action.

FACTORS THAT COULD LEAD TO A DOWNGRADE

A rating downgrade could be triggered by widening gross borrowing requirements, 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/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 any affected securities or rated entities receiving direct credit support/credit substitution from another entity or entities subject to a credit rating action (the supporting entity), and whose ratings may change as a result of a credit rating action as to the supporting entity, the associated regulatory disclosures will relate to the supporting entity. Exceptions to this approach may be applicable in certain jurisdictions.

For ratings issued on a program, series, category/class of debt or security, certain regulatory disclosures applicable to each rating of a subsequently issued bond or note of the same series, category/class of debt, or security, or pursuant to a program for which the ratings are derived exclusively from existing ratings, in accordance with Moody's rating practices, can be found in the most recent Credit Rating Announcement related to the same class of Credit Rating.

For provisional ratings, the Credit Rating 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.

Moody's does not always publish a separate Credit Rating Announcement for each Credit Rating assigned in the Anticipated Ratings Process or Subsequent Ratings Process.

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

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