Moody’s Investors Service has downgraded the Government of Maldives’ long-term local and foreign currency issuer ratings to Caa2 from Caa1, citing rising default risks amid a fragile economic situation. The ratings have also been placed under review for a further downgrade, reflecting concerns about the country’s dwindling foreign exchange reserves and mounting external debt obligations.
The downgrading of the Maldives Sukuk Issuance Limited’s long-term foreign currency backed senior unsecured rating to Caa2 from Caa1 further highlights the economic challenges facing the country. This entity, wholly owned by the Ministry of Finance, issues debt ultimately backed by the Maldivian government.
Understanding Moody’s Ratings System
To better understand the implications of this downgrade, it is crucial to grasp how Moody’s ratings system works. Moody’s rating scale assesses the creditworthiness of governments and entities, ranging from Aaa, indicating minimal risk, to C, which signifies a high likelihood of default. The ‘Caa’ category, where the Maldives now falls, is considered to be in the high-risk range, with a Caa2 rating indicating poor standing and a very high risk of default.
A rating under review for downgrade means that further deterioration in economic conditions could prompt another downgrade, indicating an even higher risk of default. For investors and stakeholders, this signifies increased caution in lending or investment, as the likelihood of repayment becomes more uncertain.
Moody’s Rationale for the Downgrade
The downgrade is primarily driven by Moody’s assessment that default risks have risen significantly due to low foreign exchange reserves and the narrowing time for their accumulation. The Maldives faces significant external debt obligations over the next 12 to 18 months, and while some efforts are being made to secure external financing, the availability of comprehensive funding remains uncertain.
Additionally, the large fiscal and current account deficits exert pressure on the already low reserves, and delays in implementing necessary fiscal reforms further exacerbate the situation. Governance weaknesses, particularly in adopting swift measures to mitigate external vulnerabilities, have also been highlighted as a critical concern by Moody’s.
Central Bank’s Response
In response to Moody’s downgrade, the Maldives Monetary Authority (MMA) has issued a statement emphasising its confidence in the country’s economic performance and its ability to meet upcoming debt obligations. The central bank projects GDP growth to reach 4.9% in 2024 and further expand to 6.5% in 2025, primarily supported by a robust performance in the tourism sector. The MMA noted that tourist arrivals exceeded 1.3 million by the end of August 2024, marking a 10% increase compared to the same period in 2023, with the average duration of tourist stays also rising by 7% in July 2024 compared to July 2023.
Moreover, the MMA highlighted improvements in the Maldives’ foreign exchange reserves. Gross international reserves rose from USD 395 million at the end of July 2024 to USD 444 million by the end of August 2024. Net reserves also saw an improvement, reaching USD 61 million at the end of August. With the inclusion of usable reserves and the Sovereign Development Fund (SDF) balance, the gross international reserves are expected to surpass the USD 606 million projected in the Government Budget for 2024.
Measures to Address Economic Challenges
The central bank further elaborated on ongoing efforts to stabilise the exchange rate and strengthen the foreign exchange market. The MMA announced plans to reduce the MVR 6.7 billion surplus liquidity in the banking system through Open Market Operations set to commence this year. Additionally, revisions to the Monetary Regulation will be introduced in September 2024 to boost the inflow of foreign currency into the domestic banking system.
The MMA reaffirmed the government’s capability to meet the upcoming external bond repayment due in October 2024 and assured that all future external debt obligations would be met. The statement emphasised that there is “no doubt” regarding the government’s commitment to fulfilling its debt responsibilities.
Potential Outcomes for the Maldives
As Moody’s continues its review for a potential further downgrade, the focus will be on whether the Maldives can secure adequate external financing to shore up foreign exchange reserves. The government has outlined several measures to raise foreign currency revenues, including increasing dollar-denominated airport taxes and fees, revising the green tax, and levying import duties and income taxes in US dollars. If these measures are successfully implemented, they could reduce the need for external financing and help avert a default in the near future.
However, without significant external support or more decisive policy adjustments, the Maldives could face further credit rating downgrades. A downgrade would signal continued uncertainty about the country’s ability to manage its external debt obligations and maintain economic stability.
Environmental, Social, and Governance Considerations
Moody’s also highlighted the Maldives’ high exposure to environmental and social risks, with an ESG Credit Impact Score of CIS-5. The Maldives is highly vulnerable to climate change due to its low-lying geography, which threatens its tourism-based economy. Additionally, governance issues, particularly in fiscal management and combating corruption, further constrain the rating.
While Moody’s downgrade reflects significant economic challenges for the Maldives, the central bank’s response paints a more optimistic picture of the country’s resilience and growth potential. As the situation unfolds, much will depend on the Maldives’ ability to secure external financing and implement critical economic reforms to navigate these challenging times.
