AKIPRESS.COM - The IMF's approval of a financing arrangement for Mongolia reduces the country's external financing risks and should put the economy on a more stable footing, says Fitch Ratings.
The IMF programme will also promote sustainable fiscal policies, which could support Mongolia's credit profile over the medium term. However, there will be implementation challenges in meeting budget targets and medium-term debt sustainability is highly dependent on the success of large mining projects.
The refinancing of USD580 million in government-guaranteed bonds in March has already demonstrated an improvement in Mongolia's access to international financial markets since a staff-level IMF agreement was reached in February. The IMF-led financing package itself will total around USD5.5 billion, including USD434 million under a three-year External Fund Facility, around USD3 billion from multilateral and bilateral partners, and an extension of the CNY15 billion (USD2.2 billion) swap line with the People's Bank of China. The high likelihood of IMF support was factored into our decision to affirm Mongolia's sovereign rating at 'B-'/Stable in February 2017.
The support package and stronger market confidence should ensure that Mongolia can meet its external obligations over the next few years, and should support greater stability of the Mongolian tugrik, which depreciated by 20% against the US dollar in 2016. The partial recovery in commodity prices has also relieved some pressures - commodities account for around three-quarters of Mongolia's exports and mining activity represents about 20% of GDP. Overall, the near-term risk of default has fallen sharply from last year.
The IMF programme's conditions include commitments to financial-sector reform, a strengthening of central-bank governance and exchange-rate flexibility. Fiscal consolidation is also a key component. The budget deficit surged to 17% of GDP in 2016 from 8.5% in 2015, and Fitch estimates that general government debt rose sharply to around 92% of GDP at end-2016, well above previous limits set in a Fiscal Stability Law. The government is now targeting a budget deficit of about 10% in 2017 and aims to reduce this to below 7% by 2019 under its new medium-term budget framework.
A poor track record in hitting fiscal targets in recent years suggests there is a risk of some slippage. Nevertheless, we expect a significant reduction in the deficit over the next two years, given ongoing collaboration with the IMF and a desire to avoid a resurgence of market pressures ahead of future refinancing exercises. Failure to make meaningful progress on fiscal consolidation would undermine the recent improvement in market sentiment and expose the country again to refinancing risks, particularly since a considerable proportion of government borrowings is now in the form of marketable external debt.
Fiscal consolidation is likely to act as a headwind to economic growth in the short term, but medium-term prospects are much stronger, owing to the second phase of the Oyu Tolgoi (OT2) underground copper mine and other natural resources projects, such as the Tavan Tolgoi coal mine. We expect real GDP growth to pick up to 8.0% by 2019, from just 1% in 2016. Stronger growth should support medium-term debt sustainability, with general government debt likely to stabilise next year - albeit at around 94% of GDP based on Fitch estimates, well above the 51% median for 'B' rated countries. A substantial increase in export revenue generated by OT2 and other projects should also guard against a return of external finance pressure beyond the time-frame of the IMF programme.