Fitch Affirms Maldives' Rating at 'B-' with a Negative Outlook: Navigating Economic Challenges and Opportunities

Fitch Ratings has reaffirmed the Maldives' Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-', maintaining a Negative Outlook. This rating action reflects the balance between the country's favorable GDP growth outlook and its high public debt burden, low foreign-reserve buffers, and vulnerability to external shocks, particularly those affecting the tourism sector.

Key Rating Drivers

Negative Outlook: The 'B-' rating is driven by several factors. On the positive side, the Maldives has a robust GDP growth outlook, underpinned by strong prospects in the tourism sector. The country's high per capita GDP relative to peers in the 'B' rating category and ongoing bilateral and multilateral financing support, facilitated by its strategic geopolitical importance, also contribute to the rating. However, these positives are counterbalanced by the Maldives' high and rising government debt, low foreign-reserve buffers, and susceptibility to shocks that could undermine tourism.

The Negative Outlook indicates potential risks from heightened external financing and liquidity strains. These challenges could threaten the currency peg to the US dollar amid rising external debt servicing, dwindling foreign reserves, and tight global financial conditions.

Foreign-Reserve Pressures: Fitch highlights ongoing pressure on the Maldives' foreign reserves due to significant import bills for energy and food and the Maldives Monetary Authority's (MMA) interventions to support the currency peg. In December 2022, the MMA drew $100 million from a $200 million currency swap line with the Reserve Bank of India. Gross foreign reserves fell by 16.6% in the first eight months of 2023, totaling $694 million. Fitch estimates that foreign reserves will cover only 1.1 months of external payments in 2023, well below the projected 'B' median of 3.5 months.

Rising External Debt Servicing: The Maldives faces a challenging refinancing outlook for its external debt over the next few years. The government has $232 million in external debt-servicing obligations and $298 million in publicly guaranteed obligations due in 2024. External debt servicing is expected to rise further to $363 million in 2025, peaking at $887 million in 2026, including the repayment of a $500 million sukuk. Declining reserve buffers could increase the risk of the sovereign's ability to meet these obligations.

Current Account Deficit: Fitch forecasts the current account deficit (CAD) to decline modestly to 14.0% of GDP in 2024 from 15.1% in 2023, driven by moderating global commodity prices and strong tourism receipts. However, the CAD will remain much higher than the 3.2% median for 'B' category peers, reflecting the Maldives' heavy reliance on imports of basic food products, energy, and capital goods.

Fiscal Deficit and Public Debt: The fiscal deficit is projected to narrow slightly to 11.3% of GDP in 2023 from 11.6% in 2022, primarily due to delays in unwinding fuel and electricity subsidies during an election year and accelerated capital expenditures on infrastructure projects. Despite an expected reduction in subsidies, the fiscal deficit is projected to remain high at 10.1% in 2024. General government debt is forecasted to rise to 101.7% of GDP in 2025 from 96.4% in 2022, well above the 'B' median of 53.9%.

Political Stability and Governance: The recent presidential election, won by opposition candidate Dr. Mohamed Muizzu, implies some near-term policy uncertainty. However, Fitch expects a smooth political transition and the continuation of economic policies supporting tourism and infrastructure development. Muizzu has pledged to raise GDP per capita to $17,000 within five years, boost foreign reserves net of MMA's short-term liabilities to more than $500 million, and facilitate fiscal consolidation, although detailed plans are pending.

Rating Sensitivities

Factors for Negative Rating Action:

• External Finances: Heightened external liquidity pressures due to failure in building up foreign-currency reserves or increased refinancing difficulties.

• Public Finances: A sustained rise in government debt or guarantees to state-owned enterprises without credible fiscal consolidation.

Factors for Positive Rating Action:

• External Finances: Strengthening of external buffers through accumulation of foreign-currency reserves.

• Public Finances: Significant progress in implementing a credible fiscal consolidation strategy, leading to a declining debt trajectory.

Conclusion

Fitch's affirmation of the Maldives' 'B-' rating with a Negative Outlook underscores the delicate balance between the country's strong growth prospects and its significant economic vulnerabilities. The Maldives' ability to navigate these challenges through effective fiscal consolidation, enhanced foreign-reserve management, and sustained tourism and infrastructure development will be crucial in determining its future economic stability and rating outlook.