Fitch - MEF - April 2015

Sovereign Rating Methodology & Mongolia Rating

Andrew Colquhoun

Head of Asia Pacific Sovereign Ratings

1 www.fitchratings.com

Sovereign Rating Methodology

• Structural Factors

• GDP per capita, share in world GDP

• Financial system stability

• Governance, rule of law

• 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

Sovereign Ratings Distribution of 106 rated sovereigns

Source: Fitch Ratings

Countries


Sovereign Rating Model (SRM)

• Rating model, not sovereign default

probability model

• Empirically based on indicators

referenced in Fitch methodology

• 19 statistically significant indicators

• Forward-looking, through-the-cycle

• 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)

Source: Fitch “Sovereign Rating Model", August 2014

25%

17%

10%

47%

Structural

Factors

Public

Finances

Macroeconomic

External

Finances


Investment grade Speculative grade

Issuer Default Ratings (IDR)

Cumulative 5-year Probability of Default (ex post)

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

Source: Fitch

4

www.fitchratings.com

Mongolia

Public debt levels are high

Public Debt Stock (USD m) Public Debt (% of GDP)

Increase in marketable debt Debt levels exceed peers

0

2,000

4,000

6,000

8,000

2010 2011 2012 2013 Q314

Domestic debts

External bonds & guarantees

External concessionary loans

0 50 100

Zambia (B)

Mozambique (B+)

Kenya (B+)

'B' Median

Mongolia (B+)

Egypt (B)

2014e

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

5


People’s Bank of China Swap External Liquidity Resources

02,0004,0006,0008,000

10,00012,00014,00016,000

Ja

n-1

3

Ap

r-1

3

Ju

l-13

Oct-

13

Ja

n-1

4

Ap

r-1

4

Ju

l-14

Oct-

14

Ja

n-1

5

PBoC swap (limit)

PBoC swap (drawn)

0

1,000

2,000

3,000

4,000

5,000

6,000

Ja

n-1

3

Ap

r-1

3

Ju

l-13

Oct-

13

Ja

n-1

4

Ap

r-1

4

Ju

l-14

Oct-

14

Ja

n-1

5

PBoC swap (undrawn)

Gross Reserves

High usage of bilateral swap Liquidity resources have declined

Mongolia

External liquidity is weak

Source: CEIC, Bank of Mongolia, Fitch

(CNY m) (USD m)

6


Mongolia

Key Rating Drivers

Summary Strengths and

Weaknesses

Rating Sensitivities

External Finances are Key to Maintain Rating at B+

Relative to ‘B’ range credits, i.e. those rated B+, B and B-

Source: Fitch

Status Trend

Macroeconomic Neutral Stable

Public Finances Weakness Stable

External

Finances

Weakness Negative

[?]

Structural

Issues

Strength Negative

Negative (Rating Downgrade)

• Continued depletion of external liquidity

resources

• Emergence of systemic financial stress

Revert to Stable Outlook (from Negative)

• A favourable resolution to the Oyu Tolgoi

Phase 2 dispute

• Credible and coherent macroeconomic

policy-making that increases confidence in

Mongolia’s basic economic stability


Disclaimer

Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.

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.

A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not

address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.

A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its

agents in connection with a sale of securities.

Ratings may be changed or withdrawn at any time for any reason in the sole discretion of

Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not

a recommendation to buy, sell, or hold any security.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE

LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

Fitch - MEF - April 2015

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