Fitch Ratings - Hong Kong - 01 Sep 2025: 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
Strengths and Weaknesses: Mongolia's ratings are supported by strong medium-term growth, modest government debt and high per capita income relative to 'B' category peers. The ratings are constrained by the country's high reliance on external funding and commodity exports to China, making 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 has suffered from policy uncertainty.
Resilient Growth: We forecast real GDP growth will pick up to 5.7% in 2025, from 5% in 2024, driven by an agricultural recovery after two harsh winters. Coal exports have fallen by 40% in the first seven months of 2025 due to a price shock, but strong copper exports have largely offset the impact. We expect growth to remain robust at 5.3% in 2026 and 2027, underpinned by continued investment in the mining sector and solid non-mining activity. However, a potential shift in Chinese demand for Mongolia's mining exports remains a key downside risk.
Mining and Infrastructure-Driven Expansion: Major mining and infrastructure projects continue to bolster medium-term growth. The underground phase of the Oyu Tolgoi copper mine continues to support gradual increases in production. Construction of a new cross-border railway linking Mongolia to China's ports began in June 2025 and we expect it to boost transportation capacity by 30 million tonnes annually upon completion in 2027.
Moderate Fiscal Deficits: Fitch projects a fiscal deficit of 1.8% of GDP in 2025, following a 1.3% surplus in 2024. The amended 2025 budget, passed in August, cut current and capital expenditure by MNT1.3 trillion and MNT500 billion, respectively, in response to a MNT3.3 trillion (about 3.5% of GDP) revenue shortfall. The revised budget projects a structural balance of 1.5% of GDP deficit, which excludes allocations to the Fiscal Stabilisation Fund (FSF) and the Sovereign Wealth Fund (SWF), implying an overall surplus of 1.1% of GDP. However, revenue assumptions may be difficult to meet, with collections at only 51% of the revised target through July.
Expansionary Pro-Cyclical Policy: We expect the non-mineral primary fiscal deficit to widen to 15% of non-mining gross value added in 2025 and 2026, from 12.9% in 2024. Fiscal rules have been strengthened in recent years, but the implementation record is still short, implying uncertainty about enforcement during external shocks. Some rules, such as the current expenditure cap at 30% of GDP, are inherently pro-cyclical and allow for higher spending during periods of strong economic growth. Government spending reached a record 38.2% of GDP in 2024 amid historically strong revenue from the commodity boom.
Stable Debt; Contained Maturities: Fitch projects government debt to decline to below 40% of GDP in the medium term, from 41.8% of GDP at end-2024, following sharp declines since the pandemic. However, a substantial share of public debt is denominated in foreign exchange, highlighting exchange-rate risk. The government partially refinanced external debt securities maturing in 2026 and 2027 earlier this year, further smoothing the maturity profile. The government holds deposits exceeding 10% of GDP, including about 6% of GDP in the SWF and 2% of GDP in the FSF, mostly with the central bank and partly reflected in reserves.
Elevated Inflationary Pressure: Headline inflation accelerated to 9.6% in February 2025 before easing slightly in recent months. Fitch forecasts inflation to average 8.5% in 2025-2026, driven by strong domestic demand, higher utility tariffs and rapid credit growth, which is above the Bank of Mongolia's (BoM) 4%-8% target. The BoM raised its policy rate by 2 percentage points to 12% in March 2025 after multiple cuts in 2024 and has tightened banks' reserve requirement three times since 4Q24.
Persistent External Vulnerabilities: Fitch expects the current account deficit to widen to 12% of GDP in 2025, from 10.5% in 2024, and to remain elevated over the medium term. The deficit is largely financed by foreign direct investments, but structurally large service and primary income deficits constrain reserve accumulation from commodity exports. Gross FX reserves stood at USD5.4 billion as of July 2025 (just over three months of external payments), which is low given Mongolia's narrow economic base. Net foreign assets rose to USD4 billion after partial repayment of swap liabilities to the People's Bank of China.
Net external debt, at about 120% of GDP at end-2024, is nearly 6x the 'B' median, although over 30% of this is FDI, and more than 20% are 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 an ESG Relevance Score of '5[+]' for Political Stability and Rights and '5' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the WBGIs have in our proprietary Sovereign Rating Model. Mongolia has a medium WBGI ranking at the 47th percentile.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- External Finances: Materialisation of significant external stress, potentially undermining external financing flows and leading to a decline in foreign reserves, for example, as a result of 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 FDI 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, which reduce pro-cyclicality and are consistent with reductions in the government debt/GDP ratio and the build-up of fiscal buffers.
- Macroeconomic and Structural: Sustained strong economic growth without the emergence of imbalances, supported by a business environment conducive to robust FDI 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 (LT FC) IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM score to arrive at the final LT FC 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 FX 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 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.
Country Ceiling
The Country Ceiling for Mongolia is 'BB-', one notch above the LT FC 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 payments.
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.
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 50 for the 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 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 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 WBGIs is relevant to the rating and a rating driver. As Mongolia has a percentile rank above 50 for the 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 a 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.
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 http://www.fitchratings.com/topics/esg/products....

Published Date:2025-09-02