Singapore, May 21, 2020 — Moody’s Investors Service (“Moody’s”) has today downgraded the Government of Maldives’ long-term local and foreign currency issuer and the foreign-currency senior unsecured ratings to B3 from B2 and maintained the negative outlook.
The drivers of the downgrade include Moody’s expectation that the ongoing shock to the tourism sector, precipitated by the global coronavirus outbreak, will significantly impair economic activity and raise government liquidity risks, exacerbating weak fiscal and external positions. Moreover, challenges to macroeconomic stability will persist given limited policy effectiveness and financial buffers to arrest a significant deterioration in credit metrics.
The coronavirus outbreak, deteriorating global economic outlook, and falling asset prices are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody’s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
For Maldives, the shock transmits mainly through a collapse in the country’s tourism receipts, which are a vital source of government revenue and foreign exchange earnings. With existing fiscal weaknesses and a fragile external position with low reserves coverage of external debt and import payments, the shock will exacerbate government liquidity risks. Heightened liquidity risks will in turn intensify external pressures.
The negative outlook reflects further downside risks to Maldives’ credit profile. A potentially sharper and longer contraction in economic activity would exert greater pressure on government and external finances than Moody’s currently assume with significant negative implications for macroeconomic stability. The negative outlook also relates to limited fiscal space and financing options in the context of a rising debt burden and sizable financing requirements that may contribute to higher government liquidity pressures in the coming years, and especially ahead of a large bond maturity in 2022, even amid an eventual normalization in economic activity.
Concurrently, Maldives’ long-term local-currency bond and deposit ceilings are lowered to Ba3 from Ba1. The long-term foreign currency bond ceiling is lowered to B1 from Ba3, while the foreign currency deposit ceiling is lowered to Caa1 from B3. The short-term foreign currency ceilings for bonds and deposits remain Not Prime. These ceilings act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.
RATIONALE FOR THE DOWNGRADE TO B3
UNPRECEDENTED SHOCK TO THE TOURISM SECTOR WILL DEPRESS GROWTH, REVENUE AND RAISE GOVERNMENT LIQUIDITY RISKS
The global coronavirus outbreak has resulted in a severe and unprecedented shock to the tourism-reliant Maldivian economy. Tourism accounts for nearly 60% of the Maldives’ GDP and is a major source of government revenue and foreign-exchange earnings. In 2019, travel receipts totaled $3.2 billion (55% of estimated 2019 GDP) .
Moody’s forecasts economic activity will contract by over 10% in 2020, even assuming a gradual resumption in tourism activity in late 2020.
The economic shock places substantial pressure on government finances and raises government liquidity risks. Moody’s expects a sharp increase in Maldives’ gross financing needs in 2020, to 15-20% of GDP, driven by a sharp increase in the government’s fiscal deficit to over 13% of GDP in the current year and remaining above 10% of GDP through 2022.
Once the most acute phase of the shock has passed, Moody’s expects the government to gradually resume its large spending on infrastructure development in 2021, 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. This spending will keep fiscal deficits elevated, leading to additional borrowing that will increase Maldives’ debt burden to over 75% of GDP by 2020-21, from an estimated 60% of GDP as of end 2019.
While Moody’s expects the government will continue to seek various sources of financing from bilateral and multilateral lenders, the amounts to finance are relatively large for a small economy without a strong track record of securing external financing.
Moody’s expects the government to increase its treasury bills issuances in the domestic market, while secure sources of external financing remain limited and the likelihood of an external financing gap in the current year remains. Should the government refinance external debt domestically, this would dent foreign exchange reserves further, potentially placing greater pressure on the managed exchange rate. Moody’s does not currently expect Maldives to participate in any debt relief initiative that would require the participation of private sector creditors. A decision to do so could carry negative implications for the country’s rating.
Proceeds from the Sovereign Development Fund (SDF), the liquidity buffer established to repay the upcoming $250 million sovereign bond in 2022, can partially offset the current year’s financing gap. However, significant drawdowns in this liquidity buffer would raise rollover risks ahead of the sovereign bond’s maturity. Moreover, future accumulation of liquid assets in the SDF will depend on future tourism receipts.
Moody’s expects government liquidity risks to remain elevated even after tourism and economic activity normalize. Large external borrowing, contingent liability risks from government guaranteed debt, and weak institutional capacities and budgetary planning processes will continue to exacerbate fiscal and liquidity weaknesses.
PRESSURE ON FOREIGN EXCHANGE RESERVES RAISE EXTERNAL VULNERABILITIES
Maldives’ external position is characterized by wide current account deficits of over 20% of GDP in recent years, driven by large imports for capital investments and the high import-content of tourism activity. While a mix of foreign direct investment (FDI) and debt inflows partially finance wide current account deficits, external debt levels have continued to increase, mainly related to ongoing infrastructure development.
Moody’s expects Maldives’ current account deficit to be around 18% of GDP in 2020, with a slowdown in construction-related capital goods, tourism-related imports, a lower oil import bill and a reduction in investment income debits from foreign operators of tourism companies, preventing a further widening as export receipts from tourism collapse.
Notwithstanding the slight narrowing of the current account deficit compared to last year, Moody’s expects greater pressure on Maldives’ balance of payments given lower financing inflows. Notably, FDI inflows will decline due to stalling tourism activity. While the government has secured approximately $30 million under the IMF’s Rapid Credit Facility and is seeking an additional financing from the World Bank and Asian Development Bank, amounts secured thus far are narrower than total external financing requirements, which would pressure foreign exchange reserves further.
Foreign exchange reserves have increased to around $890 million as of end April from around $750 million as of December 2019, in part owed to the Maldives Monetary Authority (MMA) securing a $150 million swap line from the Reserve Bank of India. Net of MMA’s short-term liabilities, foreign exchange reserves stood at just $230 million, well below the levels required to cover external debt service and import payments in the upcoming years in the absence of additional financing inflows.
Overall, Maldives’ persistently fragile external position will continue to pressure macroeconomic stability. With the value of the Maldivian rufiyaa fixed to the US dollar, the MMA’s ability to respond to rising external imbalances is constrained. The exchange rate has appreciated in real effective terms over the last twelve months, and growing depreciation pressure could raise capital outflows or lower inflows, raising external vulnerability risks further.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects risks that a sharper contraction in economic activity, depending on the pace and extent of resumption in international tourism, would exert greater pressure on the government’s and external finances with significant negative implications for macroeconomic stability.
The negative outlook also reflects limited fiscal space and financing options in the context of a rising debt burden and sizable financing requirements that may contribute to higher government liquidity pressures than Moody’s currently expects in the coming years, even amid an eventual normalization in economic activity.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are material to Maldives’ credit profile with climate change threatening lives and livelihoods. Maldives is particularly vulnerable to climate change, with its average ground level elevation being only 1.5 meters, or less than five feet, above sea level. 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 research capacity.
Social considerations are a material credit consideration. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. As explained, for Maldives, the shock transmits mainly through a collapse in the country’s tourism receipts, which are a vital source of government revenue and foreign exchange earnings. More generally, given the small and dispersed population, demographic challenges are also a prevalent concern, manifested in a dearth of skilled labor and technical capacity. According to UNICEF, large wealth gaps also exist between Malé and the atolls. Compounded with inclusion issues, this contributes to relatively elevated levels of youth unemployment and low rates of women participating in the workforce.
Governance considerations are material for Maldives, as reflected in Moody’s assessment of its institutions and governance strength. Moody’s assessment takes into account challenges with respect to fiscal management, although improvements have been made with respect to improving fiscal transparency and increasing budget accountability. Moreover, some progress has been made in addressing other governance issues, including corruption. Tackling financial crimes and money laundering remains a concern.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
While an upgrade is unlikely in the near term given the negative outlook, Moody’s would likely consider stabilizing the outlook if access to external and domestic funding sources looks increasingly secure, reducing government liquidity risk.
Particularly as it relates to external financing, greater certainty over multilateral financing flows from a variety of lenders at affordable rates that cover the sovereign’s funding needs durably would support stabilizing the outlook. Such an outcome, combined with steps towards improving public financial management, would improve visibility and planning around the government’s borrowing requirements.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
Moody’s would likely downgrade the rating in the event of a more pronounced deterioration in fiscal and/or external metrics beyond our baseline assumption.
Moreover, a more protracted and prolonged period of weaker tourism activity, leading to more severe impacts on government revenue and foreign exchange earnings, would further threaten macroeconomic stability and likely lead to a downgrade of the rating.
While not Moody’s current expectation, indications that the government is likely to participate in debt relief initiatives which Moody’s concludes is likely to entail losses for private-sector creditors would be negative for the rating.
GDP per capita (PPP basis, US$): 21,874 (2018 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.9% (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: -26.1% (2018 Actual) (also known as External Balance)
External debt/GDP: 49.3% (2018 Actual)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 18 May 2020, 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 institutions and governance strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become more susceptible to event risks.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/research/Sovereign-Ratings-Methodology–PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
Full details are available at the link below:
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