Fitch Ratings - Hong Kong - 18 May 2022: Fitch Ratings has affirmed Mongolia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook.

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

KEY RATING DRIVERS

Structural Strengths, External Vulnerabilities: Mongolia's ratings are underpinned by governance indicators and per capita income that are strong relative to 'B' peers, and favourable medium-term growth prospects. The ratings are constrained by the country's high reliance on external funding, narrow economic base predominately focused on commodity exports to China, and recurring bouts of political volatility.

Near-Term Growth Remains Subdued: Fitch forecasts growth will remain subdued this year at 1.2%, following 1.4% in 2021, despite elevated commodity prices and the re-opening of international borders after achieving high Covid-19 vaccination rates. However, coal exports and other merchandise trade have been severely disrupted by ongoing closures of the border with China, Mongolia's largest trading partner, under the former's "dynamic zero Covid" policy.

Fitch expects border disruptions to ease in 2023, although further downside risk to growth could emerge if trade disruptions with China are more prolonged. Global economic spill-overs from the war in Ukraine and supply bottlenecks from import disruptions with Russia and China are leading to inflationary pressures, which will weigh on real incomes and private consumption.

Favourable Medium-Term Growth Prospects: Fitch projects GDP growth will accelerate to 6.3% in 2023 and 6.8% in 2024, as headwinds from trade disruptions and the war in Ukraine wane, and China's demand for Mongolia's key commodity exports remains reasonably buoyant. Mongolia also has the potential to harness its generous natural resource endowments, as the underground phase of the Oyu Tolgoi (OT) mine becomes operational, and improved cross-border infrastructure connectivity unleashes more economic benefits for the country.

Progress in OT Development: The recent agreement over the strategic OT mine, in which the government holds 34%, indicates easing of strained relations between the government and foreign investors over project delays, cost overruns and taxation. We believe the agreement bodes well for the continued development of the underground phase, with potential positive spill-overs to Mongolia's export receipts, fiscal accounts and foreign-investor sentiment. However, recurring bouts of political volatility over resource nationalism weigh on the rating.

Sizable Budget Deficits: Fitch forecasts the budget deficit to widen to 4.4% of GDP in 2022 (B median: 4.7%), from an estimated 3.0% in 2021, as we assume that revenue growth will be lower than the government's baseline expectations. We forecast the budget deficit to narrow to 3.7% in 2023 on stronger revenue collection as Mongolia's economic recovery gains traction. Part of the pandemic-related social welfare spending, including an increase in child money allowance (an average of 3.1% of GDP for 2021-2022), will be maintained.

Quite High Public Debt: We forecast general government debt to increase by about 4.3pp to 65.3% of GDP by end-2022, broadly in line with the projected current 'B' median of 65.9%. About 95% of government debt is denominated in foreign currency, exposing it to shocks. Our baseline expects Mongolia's favourable medium-term growth prospects and its nascent pre-pandemic record of keeping fiscal outturns in line with approved budgets will put public-debt dynamics on a modest downward trajectory.

Vulnerable to External Shocks: Fitch expects tighter global financing conditions and geopolitical spill-overs to exacerbate Mongolia's weaker external finance profile. We project Mongolia's current account deficit in 2022 to widen to 16.3% of GDP and its net external debt burden to be large at 167% of GDP. Dependence on external marketable debt raises its vulnerability to shifts in international investor sentiment. However, Mongolia's access to external financing from multilateral and bilateral creditors provided an important cushion throughout the pandemic.

Low Reserves, Looming External Maturities: We project foreign-currency reserves at USD3.6 billion by end-2022, equivalent to about 3.2x current external payments. Foreign reserves remain low in view of the around USD1.1 billion in public external debt maturing in 2023-2024, excluding contingent liabilities under the Development Bank of Mongolia (DBM).

The DBM faces significant asset-quality pressures and has a combined USD733 million (4.1% of projected 2023 GDP) in external bonds maturing in late 2023, including a JPY30 billion (1.3% of GDP) Samurai bond carrying a government guarantee. The government has instructed the DBM to explore potential early payment of its outstanding Samurai bond obligations, which if successful, would reduce contingency liability risks for the government.

Rising Inflationary Pressure: The Bank of Mongolia (BOM) raised the benchmark policy rate by a cumulative 300bp in 1Q22 to 9% in response to geopolitical spill-overs, trade disruptions and high inflation. Fitch forecasts headline inflation to average 14.2% in 2022 before slowing to 10.8% in 2023, still well above the BOM's target of 4%-8%.

Banks' Asset-Quality Risks: Banks have provided soft loans to support employment, businesses and housing programmes under the MNT10 trillion economic stimulus package, which also fuelled inflationary pressure, in Fitch's view. Strong loan growth should support banks' profitability, but it could also mask NPL recognition and understate asset-quality issues, especially from high inflation pressure.

ESG - Governance: Mongolia has an ESG Relevance Score (RS) of '5[+]' for Political Stability and Rights and '5' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Mongolia has a medium WBGI ranking at the 50th percentile, reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, 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: Heightened external stress, which may be evident from restricted access to external-financing sources or a marked decline in foreign reserves, potentially as a result of prolonged border disruptions with China.

- Public Finances: Failure to reduce the budget deficit and stabilise the government debt/GDP ratio.

- Structural Features: Political instability sufficient to significantly disrupt strategic mining projects or FDI inflows.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- External Finances: The accumulation of larger foreign-currency reserve buffers and the implementation of a debt-management strategy that lowers refinancing risks and improves external debt sustainability.

- Macroeconomic: A resumption of stronger economic growth and export trends without the emergence of imbalances, and the maintenance of a favourable business environment conducive to robust FDI inflows.

- Public Finances: Narrowing of the budget deficit consistent with a declining government debt/GDP ratio.

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns Mongolia a score equivalent to a rating of 'B' on the Long-Term Foreign-Currency (LT FC) IDR scale.

In accordance with its rating criteria, Fitch's sovereign rating committee decided not to adopt the score indicated by the SRM as the starting point for its analysis because the SRM output has migrated to 'B', but in our view this is potentially a temporary deterioration. Consequently, the committee decided to adopt 'B+' as the starting point for its analysis.

Fitch's sovereign rating committee adjusted the output from the adopted SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

- Structural Features: -1 notch, to reflect recurring bouts of political volatility around issues of resource nationalism, which could negatively impact the business environment and increases the risk of economic shocks.

- Macroeconomic: +1 notch, to reflect Mongolia's strong medium-term growth prospects, which are not reflected in the current SRM output.

- External Finances: -1 notch, to reflect high vulnerability to external shocks, given the country's narrow economic base, which is exposed to commodity prices and developments in China, moderate level of foreign-currency reserves, substantial amortisations on external marketable debt, and high net external debt ratios.

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 LT FC 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.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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.

ESG CONSIDERATIONS

Mongolia has an ESG Relevance Score of '5[+]' for Political Stability and Rights as World Bank Governance Indicators 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 50 for the respective Governance Indicator, 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 World Bank Governance Indicators 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 Governance Indicators, 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 World Bank Governance Indicators is relevant to the rating and a rating driver. As Mongolia has a percentile rank above 50 for the respective Governance Indicator, 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 record of more than 20 years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Rockville, Md. – Mongolia relies heavily on coal reserves for power and heat production throughout the country, while maintaining a highly subsidized tariff system—all of which have led to social, economic, and health crises. The most obvious ramifications can be seen in Mongolia’s capital, Ulaanbaatar, where air pollutants are measured at more than 40 times the amount deemed safe by the World Health Organization.

To address these challenges, Abt Associates will lead USAID’s Mongolia Energy Governance (MEG) Activity, which will advance electricity sector and district heating modernization by building the country’s capacity to mobilize investment for renewable energy, introduce competitive procurement, deploy advanced energy technology, and enact policy reforms. These advances will enable the country’s private sector to drive future economic growth in the energy sector while improving social development and better health due to lower pollution.

Under the five-year, $11.9 million contract (with $2 million in grants), Abt will implement the project with a local subcontractor, the Mongolian Renewables Industries Association. Abt will also partner with key members of our consortium for USAID’s Energy II IDIQ: the Stockholm and Environmental Institute, Vitelli and Associates, and Arizona State University.

Activities will include guiding energy investments, building Mongolia’s capacity for energy policy development and for monitoring energy efficiency, and ensuring 40 percent of participants are women. Overall goals for MEG include mobilizing investment for clean energy projects and bringing on additional generation capacity.

“Modernizing Mongolia's energy sector is imperative to tackle social, economic, and health crises by improving governance, attracting investment, and boosting government revenues,” said Abt Senior Vice President, International Development, Eric J. Reading. “We at Abt are thrilled to take on the challenge, in partnership with USAID, the government of Mongolia, and Mongolian NGOs.”

About Abt Associates

Abt Associates is a global consulting and research firm that combines data and bold thinking to improve the quality of people's lives. We partner with clients and communities to advance equity and innovation—from creating scalable digital solutions and combatting infectious disease, to mitigating climate change and evaluating programs for measurable social impact. https://www.abtassociates.com

President of Mongolia U.Khurelsukh became acquainted with the operations of ‘Max Agro’ LLC, which is based in Mandal soum of Selenge aimag.

In 2014, ‘Max’ Group and ‘Suu’ JSC imported 300 head of Holstein Friesian dairy cattle from the Slovak Republic, and established ‘Max Agro’ Intensive Livestock Farm.

‘Max Agro’ LLC annually receives about MNT 20 billion worth of milk from 2,500 suppliers and herders, supplying it to ‘Suu’ JSC. The company aims to further expand its activities by increasing the head of cattle from 500 to 1000. It also plans to bring the number of cooperatives established to 10 this year in order to support more herders in working together and putting their livestock animals into economic circulation.

“The sector needs to be supported comprehensively through measures such as creating the conditions for purchasing irrigation systems and farming equipment at discounted prices. Only 50 percent of the current consumption of milk in our country is supplied domestically. By establishing 30 modern farms equipped with advanced technology and about 9000 Holstein Friesian cattle, it will become possible to fully supply domestic demands, and begin exports from 2026,” said M.Bolod, Executive Director of ‘Suu’ JSC.

At its regular meeting today on May 18, the Cabinet approved a list of imported sugar, vegetable oil, and rice to be exempt from customs duty, and tasked Minister of Food, Agriculture, and Light Industry Z.Mendsaikhan to establish agreements with importing companies, which state the rights and responsibilities of the sides involved, in order to ensure the stability of the products’ prices.

To prevent the rise in price and shortage of key commodities, the State Great Khural approved the Law on Exemption from Customs on April 29, 2022. In its framework, the appropriate conditions were created for exempting sugar, sugarcubes, vegetable oil, and rice from customs duty until the end of the year and stabilize its supply and prices.

By exempting the main imported foods from customs duty, its prices are estimated to decrease by 4-7 percent.

Russia’s lower house of parliament, the State Duma, is planning to discuss the potential withdrawal of the country from the World Trade Organization (WTO) and the World Health Organization (WHO), according to Pyotr Tolstoy, the vice speaker of the parliament.

“The Ministry of Foreign Affairs sent a list of such agreements to the State Duma, and together with the Federation Council [upper house of parliament] we are planning to evaluate them and then propose to withdraw from them,” Tolstoy said on Tuesday.

The vice speaker said that Russia had already canceled its membership in the Council of Europe, and that leaving the WTO and WHO is next.

“Russia withdrew from the Council of Europe, now the next step is to withdraw from the WTO and the WHO, which have neglected all obligations in relation to our country,” he said.

Tolstoy added that the government is expected to revise Russia’s international obligations and treaties that do not currently bring any benefit but directly damage the country.

In April, Russian President Vladimir Putin said that the “illegal” restrictions placed on Russian companies by Western states run counter to WTO rules, and told the government to update Russia’s strategy in the organization by June 1.

The decision came amid the sweeping Western sanctions imposed on Moscow over its military operation in Ukraine launched in late February. Since then, Russia has been subjected to around 10,000 targeted restrictions, making it the world’s most sanctioned country.

The lure of making a quick buck has always attracted young people to invest in risky assets. For Generation Z, it is the volatility - and the decentralised nature - of digital assets such as cryptocurrency and NFTs which appeals. But they are unregulated, meaning there is little investor protection.

"All my friends were talking about [cryptocurrency] so one day I just decided why not just jump in and see if I can make some money," says 20-year-old Paxton See Tow.

All he needed was his phone and trading thousands of dollars' worth of assets was only a click away.

Generation Z - also known as Zoomers - are the age group born between the mid-1990s to early-2000s. They grew up online, playing games and meeting friends virtually, so the transition is natural.

Cryptocurrencies are digital currencies while a "non-fungible token" (NFT) is a way of owning an original digital image, touted as the digital answer to collectables.

Just over a year ago, Paxton bought S$1,000 ($743; £739) worth of Bitcoin - one of the most popular cryptocurrencies - which gave him a 10% profit straight away. He decided to quadruple his portfolio. But then the price fell.

"There's always the saying 'buy low, sell high' but I did the complete opposite. I let my emotions get the better of me," he says.

He had lost a thousand dollars, on top of all the money he had invested, before he could pull his money out and re-strategise.

For another, older trader, Kelvin Kong, the loss was much bigger. After making six figures in 2017, he lost more than half a million dollars the following year.

"I lost everything," he says. "I thought I was the king of trading and my head got really big so I thought nothing could bring me down and I kept buying," he says.

In the end, he only had a few hundred dollars left in his bank account.

"I think I almost went into depression. I had suicidal thoughts."

The boom in crypto and NFTs trading among young people worries him.

"A lot of them will lose money at the end of the day," he adds.

Gamification of trading

But cautionary tales of people losing huge amounts of money don't seem to deter young traders.

For many, the first taste of digital assets are through "play-to-earn games" which reward players with NFTs and cryptocurrencies that can then be used within the game itself, or traded for cash.

"Every kid wants to make money playing games," says a 23-year-old trader in Malaysia who goes by the name of YellowPanther. "That's the dream of my generation."

A month after he started trading NFTs last August, he decided to quit his job as a marketing executive to trade them full time.

"The day job took a long time - eight to nine hours a day - and the pay was quite low. I saw a big opportunity in the [NFT] space and I took the leap of faith," he says.

YellowPanther now works with 29-year-old Resh Chandran, who offers training in conventional stocks, cryptocurrency and NFT trading in Singapore.

Using Axie Infinity, one of the most popular "play-to-earn games", Mr Chandran introduces investors to mostly Filipino gamers who play on their behalf for a fee.

But he warns the space is a "wild wild west".

The pandemic has only accelerated this growing trend of young people trading crypto and NFTs.

"There was an extreme level of volatility in the marketplace so when you have volatility you also have opportunity in the market," says Lily Fang, a professor of finance at INSEAD business school.

"Young people were at home and it's almost a gamification of trading. All of these factors created a perfect condition for this to take off."

Financial influencers

For many young wannabe traders, advice is readily available on platforms such as YouTube, Twitter and Reddit.

Brian Jung, 23, boasts one million YouTube followers but compared to other crypto influencers, he is known to talk more cautiously about the risks.

"I really have to make sure I'm careful about what I say to my audience because the last thing I want is for people to get hurt from these types of videos," he tells the BBC.

Brian's family emigrated from South Korea to the US and he believes his background affects how he invests and talks about money.

"Our family always struggled financially so I always have this frugal mindset," he says.

"My mum still works at the US Post Office and my dad works in a warehouse so I know one hour of their time is still equivalent to dollar value. I see what that is worth, regardless of how much income that I'm getting right now."

Gaining financial freedom is also what attracted 22-year-old Jowella Lim - a rare female trader - to the crypto world.

But as well as the opportunities to make money, Jowella enjoys being at the forefront of this new technology.

As governments around the world look to regulate the industry, she believes they will help legitimise crypto and NFTs.

"Regulators have to eventually compromise and realise that this is a tech they cannot ignore, especially when it's constantly penetrating this society," she adds.

Addiction or passion?

Aside from financial losses, another big danger is addiction.

"The crypto market never sleeps so people really literally get sucked into it," says Mr Chandran.

Andy Leach, from addictions clinic Visions by Promises in Singapore, says he has seen a jump in young - particularly male - clients getting addicted to the thrill of trading crypto and NFTs.

"You have the ability to watch Bitcoin going up and down and basically this process, this rollercoaster ride, the highs, the lows, it's available on your phone 24/7," he says.

Despite losing money in the crypto market in the past, both Paxton and Kelvin are back trading after studying it more closely.

I asked Kelvin if he thinks he may be addicted. "You can put it that way," he smiles. "But I would call it passion."

Mongolia will provide domestic producers with all support possible to fully secure the domestic demand for food, President Ukhnaa Khurelsukh said Tuesday.

During a meeting with representatives of vegetable growers on the outskirts of the capital Ulan Bator, Khurelsukh pledged full assistance to them, saying that the government "will support the construction of refrigerated warehouses in all possible ways."

Mongolia imports about 40 percent of its annual vegetable demand, or about 70,000 tons, according to the presidential press office.

Recently, the president has proposed a "food supply and security" national campaign to develop agricultural clusters and establish food production complexes, so as to fully secure domestic supply for food and become a food exporter.

The number of endangered Przewalski's horses in Mongolia has exceeded 900, the Ministry of Environment and Tourism said Wednesday.

"This year marks the 30th anniversary of Takhi (Mongolian name of Przewalski's horse) reintroduction to Mongolia. Today, the population of the wild horses in the country has already exceeded 900," the ministry said.

A program to reintroduce Przewalski's horses to Mongolia dates back to 1992 when 20 Przewalski's horses were brought to the Khustai National Park and the Greater Gobi Strictly Protected Area in Mongolia from zoos in Europe and Australia, according to the ministry.

Before the program was launched, the last record of the Przewalski's horse in the wild occurred in the late 1960s in southwestern Mongolia, and thereafter no more wild horses were observed, according to a report published by the magazine of the World Association of Zoos and Aquariums in 2012.

The Przewalski's horse is believed to be the last remaining wild horse species in the world.

Coal production of Mongolia came in at 1.33 million tonnes in April, down 53.10% year on year and 14.65% month on month, showed data from the National Statistical Office of Mongolia.

In January-April, Mongolia's total coal output was 6.50 million tonnes, dropping 57.30% on the year.

Mongolia's iron ore production was 1.07 million tonnes in April, down 18.46% year on year and 0.86% month on month. Iron sand fines stood at 814,800 tonnes, down 6.69% year on year and 3.02% month on month, while iron concentrate production was 254,600 tonnes, down 41.91% year on year but up 6.75% month on month.

Mongolia's iron ore production totaled 3.28 million tonnes during the first four months of 2022, down 5.90% year on year.

(Writing by Emma Yang Editing by Harry Huo)