Maldives’ Credit Rating at B-,Outlook Negative, Says Fitch Ratings

Fitch Ratings has affirmed the Maldives’ Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a ‘negative outlook.’ 

In Fitch’s Rating Action Commentary, issued 9 October, the ratings agency said that, the ‘B-‘ rating reflects a favourable GDP growth outlook, based on strong prospects for the tourism sector over the medium term, high per capita gross domestic product (GDP) – relative to ‘B’ category peers – and continued bilateral and multilateral financing support facilitated by the country’s geopolitical strategic importance.

This is balanced, when contrasted, against the country’s high and rising government debt burden, low foreign-reserve buffers, and its vulnerability to shocks that could undermine prospects for the tourism industry, Fitch said.

The ‘negative outlook’ reflects the risk of heightened external financing and liquidity strains, which could imperil the currency peg to the US dollar amid rising external debt servicing, weakening foreign reserves and tight global financial conditions.

Fitch expects foreign reserves to remain under considerable pressure in light of sizeable import spendings on elevated energy and food, and continued intervention by the Maldives Monetary Authority (MMA) to support the currency peg.

MMA has drawn US$100 million on a US$200 million currency swap established with the Reserve Bank of India in December 2022, as gross foreign reserves fell by 16.6 percent in August to US$694 million. Fitch estimates foreign currency reserves at 1.1 months of imports in 2023, well below the projected ‘B’ median of 3.5 months.

Fitch expects the refinancing outlook to remain challenging for the nation’s external debt over the next few years.

The government has US$232 million in external debt-servicing obligations and US$298 million in publicly guaranteed obligations due in 2024. A further decline in reserve buffers could increase the risk of the country’s ability to meet its debt-servicing obligations and external debt servicing will rise further to US$363 million in 2025, and reach a peak of US$887 million in 2026, including repayment of a US$500 million sukuk, the ratings agency said.

The government maintains a portion of its US dollar revenue, such as airport development fees, in a Sovereign Development Fund (SDF) intended in principle for US dollar bond amortisation. The SDF contained the equivalent of about US$474 million in August 2023. However, the foreign-currency-denominated cash balance remained low at around US$30 million.

Fitch forecasted the current account deficit (CAD) to modestly decline to about 14.0 percent of GDP in 2024 from an estimated 15.1 percent in 2023, driven by moderating global commodity prices and buoyant tourism earnings. The CAD will stay much higher than the 3.2 percent median deficit projected for ‘B’ category peers, which mainly reflects the Maldives’ heavy reliance on imports of basic food products, energy and capital goods in light of its high fuel intensity and sustained public investments, Fitch said.

The fiscal deficit will narrow modestly to 11.3 percent of GDP in 2023 from 11.6 percent in 2022, according to Fitch, with the agency expecting stronger expenditure primarily due to a delay in unwinding fuel and electricity subsidies in an election year – 2.8 percent of GDP – and accelerated capital expenditure (capex) on main infrastructure projects, more than offsetting the increase in the tourism and general goods and services tax revenue collection. 

Fitch projects the fiscal deficit to remain high at 10.1 percent in 2024 due to sustained debt-funded infrastructure development and elevated recurrent spending, despite expected reduction in subsidies.

The agency projects that general government debt will rise to 101.7 percent of GDP in 2025 from 96.4 percent in 2022 – well above the projected ‘B’ median of 53.9 percent. The debt ratio will rise gradually over the medium term and Fitch expects a combination of high public debt and rising interest payments will leave the Maldives increasingly vulnerable to shocks, in the absence of more tangible reform progress in effective revenue mobilisation and expenditure rationalisation.

The outstanding government-guaranteed debt increased to 17.1 percent of GDP by end-2022 from 15.6 percent a year ago and the debt could result in the crystallisation of contingent liabilities on the sovereign balance sheet, though Fitch’s baseline does not expect the risk to materialise at this stage, the agency said.

With opposition candidate Mohamed Muizzu winning in the presidential runoff vote the change in government implies some near-term policy uncertainty, the agency said. However, they expected a smooth political transition and continuation of economic policies to support the tourism sector and boost infrastructure development in the medium term.

Muizzu has pledged to raise GDP per capita to US$17,000 within five years, boost foreign reserves net of the MMA’s short-term foreign-currency liabilities to more than US$500 million and facilitate fiscal consolidation, although details are few so far, Fitch highlighted in its Rating Action Commentary.

Fitch further forecasted the economy will expand by 7.2 percent in 2023 and average 6.6 percent in 2024-2025. They expected tourist arrivals to hit a record high of 1.9 million in 2023, or 11.6 percent above its 2019, pre-pandemic, level. Medium-term growth prospects will be underpinned by stronger tourism inflows and continued infrastructure developments, including a new passenger terminal scheduled to become operational in the first half of 2025, the agency noted.

Fitch assigned the Maldives an environmental, social, and governance (ESG) relevance score (RS) of ‘5[+]’ and ‘5’ for Political Stability and Rights and the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, respectively. According to the agency, these scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in the agency’s proprietary Sovereign Rating Model. The Maldives has a medium WBGI ranking at the 46th percentile, reflecting the recent peaceful political transition, a moderate level of rights for participation in the political process, institutional capacity and corruption, and an established rule of law.

Fitch Rating, dual headquartered in New York and London, is a provider of credit ratings, commentary and research. They are one of the big three credit rating agencies in the world alongside Moody’s and Standard & Poor’s (S&P).