Moody’s downgraded the Maldives’ credit rating to CAA-2 on Wednesday, citing high credit risk and growing concerns over the country’s dwindling dollar reserves, increasing debt levels, and fears of default. This downgrade places the Maldives in the “non-investment” grade category, signalling significant financial instability.
Following the downgrade, Moody’s placed the Maldives’ rating under review for a potential further downgrade. If the country’s financial situation does not improve, there is a strong possibility of additional rating cuts in the near future.
Previously rated CAA-1, the Maldives maintained its earlier rating until 27 June. However, rising economic challenges have led to Moody’s re-evaluation. The downgrade mirrors actions taken by Fitch, which recently lowered the Maldives’ rating to CC, also reflecting concerns over a potential default.
Analysts warn that the implications of these downgrades are serious, as the Maldives will likely face increased difficulty in securing funds from international markets, with borrowing expected to come at higher interest rates. They also noted that investor confidence is expected to decline, making it more challenging to attract foreign investment into the country during these uncertain times.
While the government is working on securing some external financing, comprehensive financing to meet sizeable forthcoming maturities remains uncertain while large twin deficits compound pressures on reserves, and implementation of much needed fiscal reforms continue to see delays, the statement said.
Excess domestic liquidity weighs further on limited reserves as the Maldives Monetary Authority (MMA) commits additional foreign exchange resources to maintain the peg to the US dollar, Moody’s noted.
Moody’s downgrade assessment also identified governance weaknesses in the ability of institutions to swiftly adopt measures that decisively mitigate external vulnerability risks. Limited capacity to reduce excess domestic liquidity also speaks to weaker monetary policy effectiveness, which has led to sustained pressures on the peg and foreign exchange reserves, the company detailed.
“The decision to place the ratings under review is driven by our view that Maldives’ fragile external liquidity position will likely worsen further without near term financing. The rating review will focus on assessing whether the sovereign is able to secure external financing – mainly from bilateral sources – to shore up foreign exchange reserves. In turn, this would buy time for the implementation of announced fiscal and monetary measures to raise foreign currency revenue and reduce external liquidity pressures, thereby avoiding default for the foreseeable future,” the statement said.
Additional reporting by Ibrahim H. Shihab
