- Moody's Investors Service has assigned a negative outlook for the Mongolian banking system to reflect the challenges the banks face in managing what will likely be a period of rapid loan growth in an economy that is increasingly exposed to commodity-driven boom-bust cycles.

Further underpinning the negative outlook is the presence of various structural features, such as high loan concentrations, weak risk-monitoring systems, and the developing character of the regulatory framework.

Moody's detailed the change in outlook in its first 'Banking System Outlook: Mongolia'. The outlook expresses Moody's expectations for the fundamental credit conditions in the system over the next 12-18 months.

Moody's analyst and report author Hyun Hee Park said: "Mining and government spending have become the two dominant sources of economic growth behind the current double-digit growth rates of gross domestic product (GDP) and loans, and these concentrated growth drivers raise overheating concerns and undermine the banks' ability to diversify their loan portfolios.

"Although inflation has declined from its high 2012 levels, it poses a risk that could hurt confidence in the banking system.

"Furthermore, our analysis also considers the banks' limited capital resources which provide only a weak buffer to absorb losses in a downside scenario. Under our central scenario, limited capital will put a strain on banks' ability to maintain current high loan growth."

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