Fitch Ratings affirmed Mongolia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at “B+” with “Stable Outlook”. The agency has also affirmed its Short-Term IDR at “B” and “Country Ceiling” at “B+.”

“Mongolia's economy is set to expand rapidly as the mineral sector develops, but a stronger policy framework is needed to manage the boom,” said Andrew Coguhoun, head of Asia-Pacific Sovereigns at Fitch. “The economy currently risks overheating amid rapid growth in bank lending and government spending.”

Mongolia emerged from its International Monetary Fund (IMF) program with a new fiscal policy framework, but savings have been negligible. Revision to the 2011 budget has exceeded its means as well, despite legislation put in place to defend against this scenario. Strong growth in entitlement spending 2011 that would be hard to unwind leaves the budget exposed to future commodity-price volatility. However, the moderate level of government debt—expected at just 25 percent of its gross domestic product (GDP) by the end of 2011—supports the ratings.

Real GDP grew 20.8 percent in the third quarter year-on-year, up 17.3 percent from the second quarter. Fitch projects 17 percent growth for the year. Foreign direct investment (FDI), overwhelmingly into the mining sector, totaled USD 2.7 billion or about 32 percent of GDP in the first nine months of the year. However, the boom has other drivers beyond mining: government spending was up 43 percent in October, while credit grew 79 percent. House prices rose a rapid 17 percent year-on-year in September, as well as inflation by 10 percent.

Mongolia's core public institutions and quality of governance are in the “B” range,” although maintaining these strengths once mineral revenues start flowing strongly will be crucial. Per capita income of USD 3,100 in 2011 is near the “B” range median but below the “BB” median of USD 3,700. For the long term, building fiscal buffers against commodity price volatility would be positive for the ratings, although progress on this around elections for Parliament in 2012 and the presidency in 2013 will likely be slow. Completing banking sector reform and strengthening bank supervision could reduce risks of further banking crises.