Encouraged by Moody’s positive credit profile of the Maldives released on Wednesday, the Abdulla Yameen Government has decided to stick to its existing economic policies for the remainder of its term amidst criticism by the prophets of doom in the opposition.
“The report is a further vindication of this administration’s economic plans. It confirms that the current approach is working. Year on year, this administration is delivering the policies and projects that increase economic prosperity for our nation’s citizens,” Maldivian Finance Minister Ahmed Munawar said on Thursday.
“The report encourages this administration to stick to the economic framework that has brought us this far. Expect more of the same for the remainder of this administration’s term,” he added.
Munawar described the credit rating B2 stable, as a “public good” and said: “It benefits the whole nation. As such, it is incumbent upon our communities to maintain, and improve, the rating. We must work together to sustain political stability and create an enabling environment for growth and fiscal balances. This administration remains committed to policies necessary to improve the credit rating.”
Positives and negatives
Moody’s considers the following factors as “credit positive”: (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 policy continuity and drives reform.
And the following factors are credit negative: (1) a meaningful deterioration in fiscal and debt metrics and worsening debt affordability; (2) an escalation in domestic political tensions that hinders effective policymaking or undermines growth; and (3) a shock to the tourism sector that results in a sharp fall in growth, Moody’s states.
On the challenges pointed out by Moody’s, Finance Minister Munawar said: “We are ready to tackle them. All developing countries must navigate economic obstacles in pursuit of advancement.”
According to Moody’s the B2 stable rating, Maldives reflects healthy economic growth on the back of a competitive tourism sector, strong debt affordability matrix supported by a large revenue base and a well-funded banking system.
Maldives’ GDP grew to 3.9% in 2016 from 2.8% the previous year. In addition to the tourist industry, growth has been driven by the administration’s infrastructure investment. The administration has looked to its international economic partners to fund key projects – one of which is the expansion of Velana International Airport. The work, which commenced last year and is accelerating in progress, will increase the capacity from 1.5 to 7 million passengers per year.
Economic diversification
Beyond tourism, the administration is encouraging wider economic diversification – which the Moody’s report underlines as key to achieve further growth, Moody’s noted.
The Yameen administration established Special Economic Zones (SEZs) to stimulate business and entrepreneurship, like finance and shipping, through tax incentives. Tourism related enterprises may not exceed 20% of businesses in these zones.
Moody’s also highlighted the increase in foreign exchange reserves over the past year. This was bolstered by the nation’s successful inaugural bond issuance of US$ 200 million last summer, which was twice oversubscribed.
Giving a good chit to the Abdulla Yameen government for the Maldivian economy, Moody’s says that the economy is growing despite constraints.
Writing in www.cpifinancial.net, Matthew Amlot quotes Moody’s to say that the profile of the Government of Maldives (B2 stable) is supported by the country’s strong debt affordability metrics due to a large revenue base and a well-funded banking system.
However, robust growth has been accompanied by budget and current account deficits, and a ramp-up in debt, he adds. Maldives’ small size, narrow economic diversification and low level of development also raise its vulnerability to natural disasters.
The tourism sector continues to drive headline GDP, growth in arrivals has slowed in the last few years. And, in a shift from past trends, tourist arrivals from China are falling, although arrivals from Europe remain strong despite motivated propaganda about Islamic radicalisation under President Yameen.
Large-scale projects
GDP growth has also been powered by the government’s emphasis on infrastructure development. Large projects spending on which will total around $1.5 billion or close to 30% of 2019 GDP over the next three years are being developed under the Public Sector Infrastructure Program, with the goal of enhancing Maldives’ attractiveness as a tourist destination.
However, these projects will also contribute to an increase in the debt burden over the medium term. Moody’s expects government debt to continue to rise in the coming years, to 82.2% of GDP by 2019.
Despite wide current account deficits, foreign exchange reserves have edged higher over the past year. Reserves accretion was supported by a sovereign bond issuance in June and steady inflows of foreign direct investment.
Chinese firm BoCom International
The sovereign bond sale was reportedly arranged by China’s BoCom International. The deal looked more like a private placement, or it seemed to have had anchored orders before the launch, a report said.
“Given the weak appetite of Asian investors for non-investment-grade sovereign dollar bonds, I’m wondering who bought the bonds,” a market insider was quoted as saying.
Some 83% of the notes were reportedly sold to Asian investors and 17% went to European accounts. Asset managers took 85 percent while banks and private banks bought 10 and 5%, respectively.
Close ties with China
The choice of a Chinese investment bank for the sole global coordinator reflects growing Sino-Maldives economic ties.
Straddling major shipping routes in the Indian Ocean, Maldives is an important part of China’s 21st Century Maritime Silk Road or One Belt One Road (OBOR) initiatives – a massive project of road and port building linking China to the rest of the world.
The Chinese EXIM Bank has given $373 million to finance the expansion of the Velana International Airport in Male and $66 million for the construction of a bridge to connect the capital Male with a new urban centre at Hulhumale.
Opposition warning
The Maldivian opposition led by Mohamed Nasheed says that the Abdulla Yameen administration is driving the country into a debt crisis.
In 2016, International Monetary Fund warned that the Maldives is facing “a high risk of external debt distress” due to financing the large-scale projects entirely with external loans.
The IMF and the World Bank predict debt to reach 121% of GDP by 2020.
The opposition also points out that $ 200 million got from the June bond issue was meant to pay off the $ 271 million penalty for getting rid of the Indian company GMR which was doing the Male airport expansion project.
But Finance Minister Ahmed Munawar is unfazed. The projects being financed are “necessary investments with longer-term payoffs,” he says.
As for the increasing resort to Chinese loans, many developing countries like Sri Lanka say that China not only has a deep pocket but also an eagerness to lend whatever the motive.
“The Americans come with a bag full of ideas, not money!” remarked Geographer Prof. Shantha Hennayake of Peradeniya University in Sri Lanka.
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