Outlook On Mongolia Revised To Stable From Negative; 'BB-/B' Ratings Affirmed; T&C Assessment Lowered To 'BB' From 'BB+'

--Mongolia's success in meeting policy targets under the IMF's Standby Agreement, notably expenditure restraint, augurs well for continued macroeconomic stabilization.
--We revised the outlook on the sovereign credit ratings of Mongolia to stable from negative.
--We affirmed the 'BB-/B' sovereign credit ratings and lowered the Transfer and Convertibility assessment to 'BB' from 'BB+'.

Standard & Poor's Ratings Services today revised the outlook on Mongolia to stable from negative. At the same time, Standard & Poor's affirmed its 'BB-' long-term sovereign credit rating and 'B' short-term rating on Mongolia. Standard & Poor's, however, lowered its transfer and convertibility assessment on the sovereign to 'BB', from 'BB+'.
The outlook revision takes into account the successes achieved so far in stabilizing fiscal and external liquidity positions under the aegis of the US$224 million IMF Standby Loan facility.


Against the challenges posed by a sharp economic slowdown, the government has significantly curbed fiscal expenditure so far this year to cap the budget deficit at a targeted 6.5% of GDP, and to prevent a potentially much larger and destabilizing blowout. In parallel, allowing the exchange rate to respond to market forces and to reflect underlying changes in the terms of trade yielded a steady buildup of foreign reserves following the rapid decline at the end of last year.
"By demonstrating willingness and ability to meet IMF program goals, and with continued donor support, we expect Mongolia's fiscal and external credit metrics to stabilize, so as to remain consistent with the 'BB' category," said Standard & Poor's credit analyst Agost Benard.
Standard & Poor's believes Mongolia is likely to pursue the IMF policy package to its conclusion, resulting in rationalized fiscal expenditure, a more cohesive monetary and exchange rate policy, and reduced financial system vulnerabilities.
"These reforms, together with the expected continuation of the positive terms of trade shift currently underway and a projected large expansion in mining sector output, should improve credit fundamentals again as the country emerges from the external shock and political turbulence of the recent past," Mr. Benard said.
The lowering of the Transfer and Convertibility assessment to 'BB' reflects Standard & Poor's opinion on the likelihood of future deviation from Mongolia's IMF Article VIII commitment on free current account transactions, in light of the government's earlier steps to ration access to foreign exchange. If serious balance of payments pressure re-emerges in the future, and given the inherent features of Mongolia's import structure, the government could again resort to rationing foreign exchange to priority uses.
In our view, the sovereign ratings on Mongolia could be raised if ongoing and planned fiscal, monetary, and banking sector policy adjustments continue beyond the duration of the IMF program. The emergence of an institutionalized framework for the prudent allocation of expected large fiscal revenues from expanding mining sector output would also benefit the ratings. This would increase fiscal and external buffers, countering the vulnerabilities inherent in a narrow economic profile.
On the other hand, the ratings would come under downward pressure in the event of abandonment or substantial non-compliance with the IMF Standby Loan program, or if public finances come under renewed pressure from the fiscal cost of any unexpected banking sector losses. Nevertheless, this is not our base case scenario. The ratings would also come under downward pressure from excessive recourse to commercial external borrowing, as that would adversely affect Mongolia's hitherto favorable debt interest and maturity structure.

RELATED RESEARCH
This article is based in part on the following criteria article:
"Sovereign Credit Ratings: A Primer," published May 29, 2008, on RatingsDirect.

Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

Media Contact:
David Wargin, New York (1) 212.438.1579, david_wargin@standardandpoors.com

Analyst Contacts:
Agost Benard, Singapore (65) 6239-6347
William Hess, Hong Kong (852) 2533 3595

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Source:Standard and Poor, rating agency