Fitch Ratings - Hong Kong - 19 Aug 2026: Fitch Ratings has affirmed Mongolia's Long-Term Issuer Default Ratings (IDRs) at 'B+' with a Stable Outlook.

Mongolia's ratings are supported by strong medium-term growth, modest government debt and high per capita income relative to 'B' category peers. These strengths are balanced by the country's high reliance on external funding and commodity exports to China, which make it vulnerable to external shocks. High external debt, modest foreign-exchange reserves and a record of procyclical economic policy add to external vulnerabilities. Mongolia scores well on World Bank Governance Indicators (WBGIs) relative to 'B' category peers, but faces policy uncertainty.

A full list of rating actions is at the end of this rating action commentary.

Key Rating Drivers
Mining to Sustain GDP Growth: We forecast robust real GDP growth of 5.6% in 2026 and around 5.5% in the medium term, driven by continued mining and infrastructure investment. Strong copper and gold exports remain underpinned by the expansion in underground operations at the Oyu Tolgoi mine and solid global demand. Meanwhile, resilient Chinese demand and improving cross-border transport links sustain growth in coal export volumes.

Renewed Inflationary Pressure: We expect inflation to average 10% in 2026 on persistent food price pressure and rising energy costs, holding it above the Bank of Mongolia's 4%-8% target range. The effect of the global oil price shock, triggered by the closure of the Strait of Hormuz, had been mitigated by stable, low-cost Russian supplies. However, fuel shortages have emerged in Russia since July 2026, prompting Mongolia to seek alternative supplies from Korea and China and introduce temporary fuel rationing.

Political Tension Ahead of Elections: Mongolia has had three prime ministers over the past year, reflecting heightened political instability, despite broad policy continuity under the ruling party's simple parliamentary majority. Mongolia has also entered a prolonged election cycle, with presidential and parliamentary elections due in 2027 and 2028, respectively. Party divisions and political tension could complicate decision-making on sensitive issues, such as resource management, while rising spending pressure risks fiscal slippages.

Fiscal Position to Shift to Deficits: We expect the overall fiscal balance to shift to a deficit of 2.2% of GDP in 2026, from a 1.5% surplus in 2025. The government plans to introduce a supplementary budget in September to incorporate public-sector wage increases and tax cuts. The authorities reversed value-added tax rebates introduced in 2025 and replaced them in May 2026 with a package of cuts carrying a lower fiscal cost, though these still weigh on non-mining revenue.

The government has concluded lengthy negotiations with Rio Tinto on the Oyu Tolgoi shareholders agreement. The revised terms reduce project costs and could bring forward the government's first dividend receipt to as early as 2026. We have not incorporated this into our fiscal forecasts, given uncertainty over the timing and amount.

Off-Budget Spending: Our fiscal deficit projections include expenditure on two mega projects - a hydropower plant and an oil refinery - at a combined cost of around USD2 billion, financed by concessional bilateral borrowing. We expect related disbursements of about 1.8% of GDP in 2026. The authorities exclude both projects from the budget to avoid breaching the 2.0% of GDP structural deficit ceiling, though we do not expect them to repeat such exclusions.

The ceiling applies to structural revenue, which is total revenue less allocations to the Fiscal Stabilisation Fund (FSF) and Sovereign Wealth Fund (SWF). We project these allocations to total 2.1% of GDP.

Spending Pressure: We project the overall deficit to widen further to 3.3% of GDP in 2027, reflecting pre-election spending and a proposed pension reform package costing about 1.3% of GDP annually. We expect general government debt to rise gradually in the medium term, driven by borrowing for the two mega projects, elevated current spending and transfers to the SWF and the FSF, whose combined balance stood at about 10% of GDP in June 2026.

Large CADs; Moderate Reserve Buffers: We project the current account deficit (CAD) at 5.6% of GDP in 2026 amid higher oil import costs in 2H26. The deficit is largely financed by foreign direct investment and external borrowing, while structurally large service and primary income deficits constrain reserve accumulation from commodity exports. Gross official international reserves reached USD8.0 billion in July 2026, against USD7.0 billion at end-2025, covering less than four months of current account payments (projected 2026 'B' median: 4.2).

High External Debt: Net external debt, at 112% of GDP at end-2025, is about 6x the 'B' median. However, over 30% of this is foreign direct investment and more than 20% concessional loans, both of which we expect to remain stable sources of funding. Mongolia is among the world's most commodity-dependent sovereigns, with mineral exports (almost entirely to China) accounting for 90% of external receipts and 30% of government revenue.

ESG - Governance: Mongolia has a medium WBGI ranking at 47, reflecting its record of peaceful political transitions, moderate institutional capacity, established rule of law and a moderate level of corruption.

RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-External Finances: Significant external stress, potentially undermining external financing flows and leading to a decline in foreign reserves; for example, from a commodity shock amid expansionary domestic economic policies.

-Public Finances: Significant increase in the government debt/GDP ratio; for example, from sustained budget deficits or weaker medium-term growth prospects.

-Structural Features: Political instability or major policy shifts sufficient to significantly disrupt strategic mining projects or foreign direct investment inflows.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-External Finances: Reduction in external financing risks; for example, through significant accumulation of foreign-currency reserves and a fall in net external debt, accompanied by prudent external debt management.

-Public Finances: Implementation of prudent fiscal policies that reduce pro-cyclicality and build fiscal buffers.

-Macroeconomic and Structural: Sustained strong economic growth without the emergence of imbalances, supported by a business environment conducive to robust foreign direct investment inflows.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch's proprietary SRM assigns Mongolia a score equivalent to a rating of 'BB-‌' on the Long-Term Foreign-Currency IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM score to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to SRM data and output, as follows:

- External Finances: -1 notch, to reflect Mongolia's vulnerability to external shocks, given its dependence on commodity exports to China, particularly coal, as well its high external financing needs and debt in the context of modest foreign-exchange reserves.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Debt Instruments: Key Rating Drivers
Senior Unsecured Debt Equalised: The senior unsecured long-term debt ratings are equalised with Mongolia's Long-Term IDR, reflecting Fitch's expectation of average recovery prospects in a default scenario. We have assigned a Recovery Rating of RR4 to these debt instruments.

Country Ceiling
Mongolia's 'BB-‌' Country Ceiling is one notch above the Long-Term Foreign-Currency IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt.

Fitch's Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. Fitch's rating committee did not apply a qualitative adjustment to the model result.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

Climate Vulnerability Signals
Mongolia has an elevated Climate Vulnerability Signal (Climate.VS) of 50 in 2035, mainly reflecting exposure to transition risk. This stems from exposure to green energy costs and a decline in global demand for fossil fuels. The impact of current climatic conditions as well as the current cost of decarbonizing the economy are reflected in the SRM. We have not adjusted the rating beyond that to account for these factors, given the long time scale, the high uncertainty of the potential impact or the action Mongolia might take to adapt to or mitigate the exposure.

ESG Considerations
Mongolia has an ESG Relevance Score of '5[+]' for Political Stability and Rights, as WBGIs have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Mongolia has a percentile rank above for the respective WBGI, this has a positive impact on the credit profile.

Mongolia has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption, as WBGIs have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Mongolia has a percentile rank below 50 for the respective WBGI, this has a negative impact on the credit profile.

Mongolia has an ESG Relevance Score of '4[+]' for Human Rights and Political Freedoms, as the Voice and Accountability pillar of the WBGIs is relevant to the rating and a rating driver. As Mongolia has a percentile rank above 50 for the respective WBGI, this has a positive impact on the credit profile.

Mongolia has an ESG Relevance Score of '4[+]' for Creditor Rights, as willingness to service and repay debt is relevant to the rating and is a rating driver for Mongolia, as for all sovereigns. As Mongolia has a record of 20+ years without a restructuring of public debt, as captured in our SRM variable, this has a positive impact on the credit profile.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores

Published Date:2026-08-20