Sovereign Rating Methodology

& Mongolia Rating

Andrew Colquhoun
Head of Asia Pacific Sovereign Ratings

Sovereign Rating Methodology

Structural Factors
GDP per capita, share in world GDP

Sovereign Ratings

Financial system stability

Distribution of 106 rated sovereigns

Governance, rule of law

Countries

Macroeconomic
Sustainable growth without imbalances
Rate and volatility of growth, inflation

Public Finances
Debt level and structure
Budget deficits and trends
Market depth, reserve currency status

External Finances
External debt level, structure

Current account, FX reserves, liquidity

Commodity dependence

Source: Fitch Ratings

www.fitchratings.com

Sovereign Rating Model (SRM)

Rating model, not sovereign default
probability model

Public
Finances

Structural
Factors

Empirically based on indicators

referenced in Fitch methodology

25%

19 statistically significant indicators

Forward-looking, through-the-cycle

47%

Three-year averages used for more

dynamic variables, e.g. fiscal balance,
incorporating one forecast year

Performance: 80% of actual ratings are

within one notch SRM output (2014)

17%
10%

Macroeconomic

External
Finances

Source: Fitch Sovereign Rating Model", August 2014

www.fitchratings.com

Issuer Default Ratings (IDR)

Cumulative 5-year Probability of Default (ex post)

Investment grade

Speculative grade

Note: Sovereigns data for 1995-2011, Corporate Finance data 1990-2011

Source: Fitch

www.fitchratings.com

Mongolia
Public debt levels are high
Increase in marketable debt

Debt levels exceed peers

Public Debt Stock (USD m)

Public Debt (% of GDP)

Domestic debts
External bonds & guarantees
External concessionary loans

2014e
Egypt (B)

8,000

Mongolia (B+)

6,000

'B' Median

4,000

Kenya (B+)
Mozambique (B+)

2,000

Zambia (B)

0
2010 2011 2012 2013 Q314

50

100

Source: National Sources, Fitch

Source: Ministry of Finance, World Bank, CEIC, Fitch

www.fitchratings.com
4

Mongolia
External liquidity is weak
High usage of bilateral swap

Liquidity resources have declined

Peoples Bank of China Swap

External Liquidity Resources

PBoC swap (limit)

PBoC swap (drawn)

(CNY m)

PBoC swap (undrawn)

Gross Reserves

(USD m)

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

6,000
5,000
4,000
3,000
2,000
1,000
0
Jan-13

16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0

Source: CEIC, Bank of Mongolia, Fitch

www.fitchratings.com
5

Mongolia
Key Rating Drivers
External Finances are Key to Maintain Rating at B+
Summary Strengths and
Weaknesses

Rating Sensitivities
Negative (Rating Downgrade)

Continued depletion of external liquidity

resources
Emergence of systemic financial stress

Status

Trend

Macroeconomic

Neutral

Stable

Public Finances

Weakness

Stable

Revert to Stable Outlook (from Negative)

External
Finances

Weakness

Negative
[?]

A favourable resolution to the Oyu Tolgoi

Phase 2 dispute

Structural
Issues

Strength

Negative

Credible and coherent macroeconomic

policy-making that increases confidence in
Mongolias basic economic stability

Relative to B range credits, i.e. those rated B+, B and BSource: Fitch

www.fitchratings.com
6

Disclaimer
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Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings
are inherently forward-looking, embody assumptions and predictions that by their nature cannot be
verified as facts, and can be affected by future events or conditions that were not anticipated at the
time a rating was issued or affirmed.

The information in this presentation is provided as is without any representation or warranty.

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address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.
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agents in connection with a sale of securities.
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