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Moody’s assigns provisional (P)B2 rating to Maldives’ senior unsecured notes – CPI Financial

Aerial view of Maldives Monetary Authority (MMA) in capital Male.

The senior unsecured notes will rank pari passu with all of the Republic of Maldives’ current and future senior unsecured external debt. The (P)B2 rating assigned to the notes mirrors the Republic of Maldives’ issuer rating of B2.

The provisional (P)B2 rating is based on the preliminary prospectus dated five May 2017. Moody’s will assign a definitive rating upon receipt and review of the final documentation. The proceeds of the notes are intended to primarily serve to finance government investment spending.

The Maldives’ B2 issuer rating reflects our assessment of low economic, government financial and institutional strengths, and moderate susceptibility to event risk. Over the past year, Maldives’ economy has sustained robust growth, supported by the tourism and construction sector. However, this has been accompanied by twin budget and current account deficits and a ramp-up in debt. The Sovereign Bond Methodology indicative rating range is Ba3-B2.

The Maldives’ ‘Low (+)’ economic strength reflects its small size and a narrowly diversified economy, balanced by moderate per capita income. An archipelago of islands in the Indian Ocean, the Maldives has a nominal GDP of just $3.8 billion, which is the sixth smallest GDP among the sovereigns that Moody’s rates, and one of the smallest B-rated sovereigns. By contrast, the Maldives’ GDP per capita of $15,585 in purchasing power parity terms in 2016 has nearly tripled since 2000 and positions the country around the middle of the group of Moody’s-rated sovereigns.

The economy is dependent primarily on tourism-related activities. While the sector has competed effectively in the past, it is subject to the vagaries of nature, as well as fluctuations in tourist arrivals. Reliance on tourism makes GDP growth volatile. For example, between 2006 and 2015, the standard deviation of GDP growth was in the top decile of all countries rated by Moody’s.

While GDP growth has been relatively robust, at 5.3 per cent between 2010 and 2015, it has decelerated markedly from the 14.2 per cent average growth rate recorded between 2006 and 2008, a period marked by reconstruction following the 2004 tsunami. A step-up in GDP growth over the medium term will rest primarily on the successful implementation of the government’s planned infrastructure projects while containing political tensions. Along with foreign investment in the sector, this could pave the way for a continued expansion in tourism capacity.

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Overall, the economic strength score for the Maldives is set at ‘Low (+)’ — below the indicative score of ‘Medium (-)’ — because, in the absence of a World Economic Forum’s competitiveness indicator for the Maldives, we reflect infrastructure constraints in our assessment of economic strength. The adjustment also takes into account the possibility of significant economic loss stemming from the Maldives’ exposure to natural disasters and climate change due to the economy’s reliance on natural assets-based tourism. The low-lying archipelago features and the islands’ high dependence on a few key environmental assets make the Maldives especially vulnerable to the threat of climate change.

Our assessment of ‘Low’ institutional strength reflects the challenges associated with developing institutional quality in a small island state that is geographically spread out and diverse. These constraints are reflected in the country’s relatively low rankings on the Worldwide Governance Indicators. A scarcity of skilled labour also limits the sovereign’s institutional capabilities.

Since the introduction of a new constitution in 2008, there have been sweeping changes to the Maldives’ institutional framework, and several institutions are relatively new. Inflation levels are low but fairly volatile as a result of a large imported content of domestic consumption.

Given that a strict interpretation of the quantitative metrics in the scorecard does not fully reflect a country’s credit profile, the Maldives’ score for Institutional Strength is set at ‘Low’ , below the indicative score of ‘Low (+)’, to reflect the relatively undeveloped budgeting process and gaps in data availability that hamper policy effectiveness. In addition, issues with data availability and data revisions limit a more thorough economic analysis and could impair the policy response to negative shocks.

The Maldives’ ‘Low (+)’ fiscal strength is driven by a high and rising general government debt burden and a relatively large proportion of foreign-currency-denominated debt, balanced by strong debt affordability metrics. At 64.7 per cent of GDP in 2016, debt is significantly above the median for B-rated sovereigns and will likely rise further over the next two-three years, with the planned implementation of large public-sector infrastructure projects. Nonetheless, strong revenue collection, particularly from the tourism sector, supports debt affordability.

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We adjust the Maldives’ fiscal strength score to ‘Low (+)’ from ‘Moderate’ to reflect risks surrounding the 2017 revenue measures, which if only partly implemented will lead to higher deficits and a rapid increase in government debt.

Our assessment of the Maldives’ ‘Moderate (+)’ susceptibility to event risks is driven by domestic political risk. As ongoing tensions perdure, leading to prolonged political uncertainty, the struggle for power between political parties could adversely affect the nature and effectiveness of policies and durably weigh on tourism activity, investment and growth.

High fiscal deficits and a relatively short maturity of domestic debt implies that gross borrowing needs are sizeable. We assess government liquidity risks as ‘Moderate (-)’ and adjust it from ‘Very Low’. In the absence of a market-implied rating for the Maldives, the scorecard does not fully capture the liquidity constraints that the government may face.

While the country’s current account deficits are wide, foreign reserves have been supported by foreign direct investment inflows. Moody’s External Vulnerability Indicator — which measures the adequacy of foreign reserves relative to maturing long- and short-term debt — will rise to 70 per cent this year, remaining significantly below the levels of over 100 per cent reached between 2008 and 2012. We adjust the Maldives’ external vulnerability risk score to ‘Moderate (-)’ from ‘Low (-)’ to account for the economy’s high import dependency and potential volatility in balance-of-payment receipts related to tourism and FDI.

Meanwhile, the banking system is fairly large, but it is also liquid and well-capitalised — we therefore assess the Maldives’ banking sector risk as ‘Very Low (+)’.

The stable outlook on the sovereign’s B2 rating balances healthy near-term growth prospects supported by large infrastructure projects and our expectation of further improvements in competitiveness, particularly in the tourism sector. It also takes into account a significant rise in the Maldives’ debt burden (and current account deficits) as a result of a ramp-up in infrastructure spending, which is partially offset by modest debt-servicing costs and a large domestic revenue base.

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WHAT COULD CHANGE THE RATING UP/DOWN

We would consider upgrading the Maldives’ credit rating in the event of

(1) a steady reduction in fiscal deficits and the government debt burden;

(2) a successful diversification of the economy’s productive base; and

(3) a sustained period of political stability that encourages policycontinuity and drives structural reforms.

Conversely, we would consider taking a negative rating action on the Maldives’ credit rating in the event of (1) a meaningful deterioration in fiscal and debt metrics and worsening debt affordability; (2) a shock to the tourism sector, stemming from geopolitical or natural disaster risks that result in a sharp fall in growth; and (3) an escalation in domestic political tensions that hinders effective policy-making or undermines growth.

  • GDP per capita (PPP basis, $): 15,585 (2016 Actual) (also known as Per Capita Income)
  • Real GDP growth ( per cent change): 3.9 per cent (2016 Estimate) (also known as GDP Growth)
  • Inflation Rate (CPI, per cent change Dec/Dec): 2.3 per cent (2016 Actual)
  • Gen. Gov. Financial Balance/GDP: -7.4 per cent (2016 Estimate) (also known as Fiscal Balance)
  • Current Account Balance/GDP: -22.3 per cent (2016 Actual) (also known as External Balance)
  • External debt/GDP: 22.5 per cent (2016 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 11 May 2017, 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 not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed

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