The Fitch Ratings has upgraded Mongolia's Long-Term Foreign-Currency  Issuer Default Rating (IDR) to 'B' from 'B-'. The Outlook is Stable. The  upgrade of Mongolia's IDR reflects ongoing improvements to fiscal and  external metrics and progress in meeting key IMF programme targets.

Fiscal metrics have continued to improve since November 2017 when the  agency revised the Outlook to Positive from Stable. General government  revenue through May 2018 rose by 26 percent, due to stronger than  budgeted tax receipts associated with robust customs activity and the  broader economic recovery. At the same time, expenditure rose by 6  percent, broadly in line with the 2018 budget target. As a result, Fitch  now forecasts a 2018 general government deficit of 3.9 percent of GDP,  below the authorities' approved budget target of 5.9 percent, and  consistent with the gross general government debt (GGGD)/GDP ratio  remaining on a downward trajectory.

Fitch forecasts GGGD will decline to 75.3 percent of GDP by the end of  2018, down from 81.2 percent in 2017, and well below its 2016 peak of  91.4 percent following a commodity-price shock, sharp rise in  expenditure, and large currency depreciation. The agency's baseline  forecasts suggest GGGD will fall to about 70 percent of GDP by end-2020,  assuming average nominal GDP growth of 12.7 percent, a budget deficit  of 4 percent, and broad stability of the exchange rate. Nevertheless,  this scenario will still leave Mongolia's GGGD/GDP ratio well above the  current 'B' median of 62 percent.

The IMF Executive Board completed its fourth review of Mongolia's  three-year Extended Fund Facility in June 2018, citing strong  performance under the programme and that all quantitative targets had  been met as of end-March 2018. This will enable an additional  disbursement of IMF funds and provide a supportive backdrop for other  external donors to approve further disbursements under their respective  arrangements that together form Mongolia's IMF-led USD 5.5 billion  external financing package, initiated in mid-2017.

External buffers have strengthened. Foreign reserves rose to USD 3.3  billion by end-May 2018, up from about USD 1 billion in early 2017,  supported by donor inflows tied to the IMF programme. Fitch forecasts  foreign reserve coverage will rise to 4.5x current-external payments by  end-2018, up from 2.3x at end-2016, to exceed the 'B' median of 3.9x.  The agency expects the current account deficit to widen further this  year, but more than half of the increase will reflect a rise in capital  goods imports tied to the Oyu Tolgoi copper mining project, which is  funded via FDI.

The growth outlook remains favorable. Real GDP growth accelerated to  6.1 percent in 2018, up from 5.2 percent in 2017, due to rising  consumption and a surge in mining-related investment. Export volumes of coal and copper rebounded following an official visit of Mongolian Prime  Minister U.Khurelsukh to China in April 2018, which appears to have  resolved a customs dispute at the Chinese border that crippled the passage of cargo vehicles last winter. Fitch forecasts real GDP growth  of 5.2 percent in 2018 and 6.3 percent in 2019, which balances our  expectation of continued strength in private consumption and investment,  with a large drag from net exports owing to a sharp rise in consumer  and capital goods imports since early 2018.

Source: FitchRatings.com