Singapore, November 19, 2019 — Moody’s Investors Service (“Moody’s”) has today affirmed the Government of Maldives’ B2 long-term domestic and foreign currency issuer ratings and the foreign-currency senior unsecured rating and maintained the negative outlook.
The decision to maintain the negative outlook reflects Maldives’ continued fiscal weaknesses that, combined with a fragile external position, put some pressure on macroeconomic stability. Moody’s expects that the debt burden will continue to rise, at least until 2022, as the government continues to ramp up spending on infrastructure as part of a planned program. The negative outlook reflects the risk that weak public finance management and limited financing options in the context of a rising debt burden and sizeable new financing raise liquidity pressures in the next few years. In turn, heightened liquidity risks could exacerbate Maldives’ external vulnerability given ongoing low foreign exchange reserves coverage of imports and forthcoming economy-wide external debt payments.
The decision to affirm the B2 rating reflects Maldives’ strong economic growth backed by a competitive tourism sector, that provides a wide revenue base for the government. A more stable political environment may foster fiscal and economic reforms. This is balanced by Maldives’ weak institutional strength, which is likely to impede the pace of reform implementation and perpetuate fiscal weaknesses.
The local-currency bond and deposit ceilings are unchanged at Ba1. The foreign currency bond ceiling is unchanged at Ba3 and the foreign currency deposit ceiling is unchanged at B3.
RATIONALE FOR THE NEGATIVE OUTLOOK
FISCAL WEAKNESSES AND WEAK BUDGETARY MANAGEMENT RAISE GOVERNMENT LIQUIDITY RISKS
Since 2010, Maldives’ debt burden has increased by more than 10 percentage points, to 58.6% of GDP in 2017. The debt burden was broadly stable last year, at 58.3% and Moody’s expects that the debt ratio will rise up to 67.5% by 2022. With limited financing options and weak public finance management, the further rise in the debt burden poses liquidity risks that could endanger macroeconomic stability.
The increase in debt has been driven by government spending on infrastructure development under the Public Sector Infrastructure Program, which now comprises about 25% of total expenditure and is primarily targeted at improving Maldives’ economic competitiveness, particularly in the tourism sector, enhancing the basic provision of services, including water and sanitation, and facilitating population resettlement.
While productive investment could boost Maldives’ growth potential and revenue for the government, alleviating the debt burden and debt servicing costs in the future, in the near to medium term, the large financing plans without new sources of revenue will maintain Maldives’ budget deficits at wide levels.
Moody’s projections of the debt burden are based on direct obligations of the government. There is also a moderate risk that a portion of the government-guaranteed debt, which has climbed to around 15% of GDP, could crystallize on the government’s balance sheet. That would add to the government’s financing needs.
Taking into account the likelihood that actual investment amounts will fall short of the government’s plans, in line with the experience of recent years, Moody’s estimates the government’s gross financing needs at about 6.5% of GDP in 2020, from under 5% of GDP this year. At these levels, financing needs are moderate. However, they will start to increase in 2021 as the deficit widens further and spike to around 10.5% of GDP in 2022 when the $250 million sovereign bond matures.
Moody’s assumes that the government will raise between $200-300 million each year in foreign-currency-denominated debt in the next few years, in addition to project financing that has already been secured to back infrastructure spending and the continued issuance of treasury bills in the domestic market.
While the government will likely rely on various financing options, including a possible drawdown of a currency swap line with India, some of which are likely to come through, the amounts to finance are relatively large for a small economy without a track record of securing financing of this size every year for several years. Domestically, significant issuances of treasury bills may be limited by banks’ absorption capacity. Externally, financing will primarily depend on market appetite for new borrowing, and on Maldives’ ability to secure bilateral funding at more concessional rates.
Moody’s assumes that the government’s Sovereign Development Fund, established in 2018, will accumulate funds sufficient to repay the upcoming debt obligations on the 2017 sovereign bond issuance if revenue growth continues. However, a one-off negative shock to revenue would leave an additional gap in the financing sources to repay the sovereign bond in 2022.
Weak institutional capacities and budgetary planning processes exacerbate fiscal and liquidity weaknesses. Similar to many small island economies, Maldives’ technical capacities are constrained, notwithstanding some steps taken by the government towards strengthening capacity. This is shown in frequent significant slippage compared to budget assumptions, and more generally, large gaps between expenditure and revenue outturns and budgeted amounts.
AND COMBINED WITH PERSISTENT FRAGILE POSITION, POSE RISKS TO MACROECONOMIC STABILITY
As highlighted in Moody’s previous rating announcement on the Maldives, the sovereign’s external account is characterized by wide current account deficits, financed by a mix of foreign direct investment (FDI) and debt. In particular, economy-wide external debt rose to around 49% of GDP in 2018, nearly 20 percentage points higher than just two years previously.
The current-account deficit has widened significantly to average around 23% of GDP between 2016 and 2018, from an average around 7% between 2011 and 2015, due to imports related to the country’s infrastructure development program. In 2018, the deficit hit 25% of GDP, driven by a sharp increase in goods imports. Moody’s expects the current-account deficit to hover around 20-25% of GDP in the next few years, less than half of which may be financed by FDI. As a result, external debt will rise further, to high levels for an economy of the size of Maldives.
Debt financing has included project-related loans, proceeds from sovereign bond issuance and a private placement with the Abu Dhabi Fund for Development. In 2018, the Maldives Monetary Authority, the central bank, also utilised a $100mn swap line with the Reserve Bank of India, which has since been fully repaid.
At $530 million in September 2019, foreign exchange reserves cover just over 2 months of imports and would not be sufficient to meet import payments and external debt commitments in the event of delayed FDI and/or impaired access to external financing.
Weak public finance managements, rising liquidity risks and a persistently fragile external position put some pressure on macroeconomic stability. The exchange rate has appreciated in real effective terms in recent years. Depreciation pressure could raise capital outflows or lower inflows, raising external vulnerability risks further.
RATIONALE FOR THE RATING AFFIRMATION
The B2 rating reflects Maldives’ strong economic growth backed by a competitive tourism sector, that provides a wide revenue base for the government. This is balanced by Maldives’ weak institutional strength, which is likely to impede the pace of reform implementation, notwithstanding a more stable political environment potentially fostering reforms, and perpetuate fiscal weaknesses.
GDP growth has averaged 6.1% over the past decade, maintaining a relatively stable performance despite political upheavals and natural disasters. Tourism is a key driver of headline growth. Moody’s expects robust growth to continue, at around 6-6.5%, allowing the government to generate more than 25% of GDP in revenue. Moody’s takes into account Maldives’ vulnerability to climate change in its assessment of the sovereign’s economic strength.
Compared to the past few years, a more stable political environment may foster fiscal and economic reforms, although relatively weak institutional strength may hamper the effectiveness of such reforms.
However, a high and rising debt burden constrains Maldives’ fiscal strength. A rising proportion of non-concessional funding has led to a deterioration in debt affordability, with the ratio of interest payments to revenues rising to 7.3% at end 2018, from 5.4% at the end 2017. While still relatively strong, debt affordability will weaken further as the government’s market-driven funding needs grow. Moody’s projects that interest payments will absorb 8.0% of revenue in 2022.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are material to the Maldives’ credit profile. The Maldives is particularly vulnerable to climate change. Its average ground-level elevation is around 1.5 meters, or less than five feet above sea level, increasing the potential impact of climate change-related natural disasters. Aside from rising sea levels, the Maldives also faces the threat of increasing temperatures, including more frequent extreme weather events, changes in monsoon patterns and coral bleaching. The government’s approach to improving the archipelago’s resilience to climate change has been to retain and enhance islands’ existing natural flood protection features, strengthen emergency responsiveness, carry out conservation efforts and invest in a research capacity. However, the efficacy of these adaptation measures over the medium to long term is untested.
Social considerations are not a material credit consideration. Moreover, according to UNICEF, large wealth gaps also exist between Malé and the atolls. Weak service delivery and limited employment opportunities are reflected in relatively elevated levels of youth unemployment and low rates of women participating in the workforce. While these considerations are relevant, they do not seem to shape Maldives’ growth potential or significantly affect government policy and policy outcomes.
Governance is a material consideration for the Maldives, as reflected in our assessment of the sovereign’s institutional strength. This is driven by weak fiscal management, prevalent corruption, and weak governance. Tackling financial crimes and money laundering remains a concern.
WHAT COULD CHANGE THE RATING UP
While an upgrade is unlikely in the near term given the negative outlook, Moody’s would consider stabilizing the outlook if access to external and domestic funding sources looks increasingly secure and likely to maintain strong debt affordability; and combines with steps towards enhancing the budgetary management framework, that improve visibility and planning around borrowing requirements.
WHAT COULD CHANGE THE RATING DOWN
A rating downgrade would likely result from a more pronounced deterioration in fiscal and debt metrics and debt affordability than Moody’s currently expects. A shock to the tourism sector, such as through natural disasters or political events, that the government is not able to mitigate, resulting in a sharp fall in foreign exchange earnings that threatens macroeconomic stability, would also likely lead to a downgrade.
GDP per capita (PPP basis, US$): 21,874 (2018 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.1% (2018 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -0.9% (2018 Actual)
Gen. Gov. Financial Balance/GDP: -4.7% (2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -25% (2018 Actual) (also known as External Balance)
External debt/GDP: 49.0% (2018 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 14 November 2019, a rating committee was called to discuss the rating of the Maldives, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutional strength/framework, have materially decreased. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become less susceptible to event risks.
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