S&P cuts rating on Mongolia's long-term sovereign debt

S&P cut its long-term rating on the northern Asian nation's sovereign debt by one notch to B-.

Mongolia's mixed mining policies, weaker terms of trade and lessened institutional effectiveness - with the latter hampering the government's policy response - led the ratings agency to slash its projection for the country's GDP growth in 2016 from 2.6% to 1.3%.

In parallel, S&P cut its forecast for the country's GDP growth rate between 2016 and 2019 from 4.0% to 3.2%.

The country had been in the headlines recently after the new government consolidated spending from off-balance sheet vehicles into the public accounts, revealing that the government's red ink was in fact closer to 21% of GDP and not 9.1%.

Due to the above, the analysts estimated the country's stock of public debt would hit 78% of GDP in 2016, against a previous estimate of 65.8% and peak of 94.7% expected in 2018.

Nonetheless, S&P admitted that either of the two large mining projects now underway in the country, the Oyu Tolgoi gold and copper mine operated by Rio Tinto and the Tavan Tolgoi coal mine, "could transform the economy."

"Although these two projects could transform the Mongolian economy, our ratings reflect the risks associated with these projects while they are being developed."

S&P said it expected more "supportive" mining policies from the new government.

On 18 August, Mongolia's central bank hiked its main policy rate by 4.5 percentage points to 15.0% in a bid to halt a 14% slide in the currency, the tugrik, over the past three weeks.

That prompted the FT's Lex column to write: "A country that once showed promise needs a plan and soon".

Mongolia was facing over $1bn of bonds maturing by January 2018 which were worth more several times more than its own reserves of foreign exchange, Lex pointed out.