Singapore, September 04, 2018 — Moody’s Investors Service says that the credit profile of the Government of Maldives (B2 negative) reflects the sovereign’s healthy growth and competitive tourism sector.
However, robust growth has been accompanied by budget and current account deficits, in large part because of a significant increase in infrastructure spending.
Moreover, the country’s debt burden has risen sharply over the past two years to levels above the median for B-rated sovereigns, and we expect it to rise further, to close to 70% of GDP by the turn of the decade.
Moody’s conclusions are contained in its just-released credit analysis titled “Government of Maldives,” which examines the sovereign in four categories: economic strength, which Moody’s assesses as “low (+)”; institutional strength “low (-)”; fiscal strength “low (+)”; and susceptibility to event risk “moderate (+)”.
The report constitutes an annual update to investors and is not a rating action.
Moody’s changed the outlook on the Maldives’ sovereign rating to negative from stable in July 2018 to reflect the liquidity and external vulnerability risks that the country faces, stemming from the sharp rise in government debt. These risks will likely extend to at least the beginning of the next decade when a large-scale infrastructure program is due to be completed.
Liquidity risks exist because the government has limited sources — including the domestic banking system and external investors — from which to meet sizable gross financing needs arising from the infrastructure program, at a time when it will still need financing for current spending. These risks could increase ahead of repayments on a sovereign bond falling due in 2022.
The strain on the Maldives’ fragile external position could also increase in the coming years if large imports as part of the investment projects are not fully financed by capital inflows in a timely manner and/or the exchange rate appreciates in real effective terms once again.
While the negative outlook on the sovereign rating means that a rating upgrade is unlikely in the near term, Moody’s would consider stabilizing the outlook if: (1) a less pronounced increase in the debt burden and funding needs than Moody’s currently expects; and/or (2) access to external and domestic funding sources appears increasingly secure and likely to pose less of a strain on debt affordability.
Moody’s will likely downgrade the sovereign rating if the Maldives shows: (1) a more pronounced deterioration in its fiscal and debt metrics and debt affordability than Moody’s currently expects; (2) marked strains on debt and deficit financing, resulting in significantly higher debt costs; and/or (3) a lasting shock to the tourism sector, for example, because of natural disasters or political events, that cause foreign-exchange earnings to fall sharply.
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