Moody’s Investors Service has changed the outlook on Mongolia’s (Caa1 stable) banking system to stable from negative. The outlook indicates Moody’s expectation for how bank creditworthiness will evolve in the country over the next 12-18 months.

‘Our stable outlook on Mongolia’s banking system is based on the fact that the economic program between the IMF and the Government of Mongolia will lead to a less challenging operating environment for the banks,’ says Hyun Hee Park, a Moody’s Assistant Vice President and Analyst.

‘In particular, the IMF’s Extended Fund Facility package, together with investment in phase 2 of the Oyu Tolgoi mining project, and key commodity prices above 2016 lows will help stabilize the economy and lay the foundation for a return to growth in 2018,’ adds Park.

Moody’s conclusions were contained in its just-released report on Mongolian banks titled, ‘Banking System Outlook – Mongolia, Less challenging operating environment drives stable outlook’.

Moody’s baseline scenario assumes a marginal decline of 0.2% in real GDP growth for Mongolia in 2017, because the impact from the IMF measures will not emerge until 2018. Moody’s forecasts real GDP growth of 1.8% in 2018.

Moody’s points out that the IMF is conducting a review on the banks’ asset quality, and that when the review is completed, confidence in the accuracy of reported asset values will increase, which will result in improved access to external capital.

Moody’s also explains that the banks’ funding and liquidity conditions will improve because of capital inflows. Specifically, the second phase of the Oyu Tolgoi mining project will add meaningful liquidity to the domestic deposit pool. Foreign-currency liquidity at the banks will continue to improve, as the banks reduce their foreign-currency loan exposures.

Improving liquidity has reduced funding costs, which, combined with a return to loan growth, will lead to an increase in interest earned on loans. However, an increase in credit costs will weigh on the banks’ profits, and keep profit metrics at cyclical lows in 2017, before improving in 2018.

Moody’s rates seven of the 14 commercial banks in Mongolia, and one government-related policy bank. These banks accounted for 90.1% of total system loans and 91.1% of total system deposits at end-2016.