Fitch Ratings has downgraded the Maldives’ Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘B-’, reflecting heightened risks associated with the country’s deteriorating external financing and liquidity metrics. This downgrade marks a notable decline from the B- rating that the Maldives had maintained for the past three years, having previously been downgraded to CCC during the Covid-19 pandemic.
Key Drivers of the Downgrade
Fitch Ratings cited several key factors contributing to the downgrade:
1. Worsening External Buffers: The Maldives’ foreign reserves have come under significant pressure, dropping to USD 492 million in May 2024 from USD 748 million the previous year. This decline is attributed to a persistently high current account deficit (CAD), interventions by the Maldives Monetary Authority (MMA) to support the currency peg, and the repayment of a USD 100 million swap arrangement with the Reserve Bank of India.
2. Liquidity Challenges: The forecast for foreign-reserve coverage of current external payments remains low at 0.9 months in 2024, significantly below the projected median of 4.2 months for countries rated ‘B’. The Maldives faces substantial external debt-servicing obligations, with USD 233 million due in sovereign external debt and USD 176 million in publicly guaranteed external debt in 2024. Total external debt servicing is expected to rise to USD 557 million in 2025 and exceed USD 1.0 billion in 2026, including the repayment of a USD 500 million sukuk.
3. Continued External Support: Fitch expects the Maldives to rely on bilateral and multilateral financing support due to its geopolitical importance and anticipated policy actions by the new government. The Sovereign Development Fund (SDF), although established for US dollar bond amortisation, holds a limited cash balance of USD 54.4 million as of June 2024.
4. Persistent External Imbalances: The Maldives’ CAD is projected to remain high at 19.7% of GDP in 2024, driven by significant public investment and heavy reliance on imports of basic goods. Despite strong tourism receipts, the country faces persistent US dollar shortages and pressure in the foreign-exchange parallel market.
Fiscal and Economic Outlook
Fitch projects a gradual fiscal consolidation, with the fiscal deficit expected to fall to 12.7% of GDP in 2024 and 11.0% in 2025 from an estimated 14.5% in 2023. This improvement is attributed to stronger revenue collection from robust tourism growth, rationalisation of capital expenditures, and gradual reforms in subsidies and healthcare.
However, the Maldives’ rising public debt ratio remains a concern. Fitch forecasts general government debt to rise to 117.6% of GDP by 2026 from an estimated 109.4% in 2023. The sizeable government-guaranteed debt, which fell to about 14.0% of GDP in 2023, continues to present contingent liability risks.
Governance and Political Stability
The Maldives has an ESG Relevance Score of ‘5’ for Political Stability and Rights, and for Rule of Law, Institutional and Regulatory Quality, and Control of Corruption, indicating the significant weight of these factors in Fitch’s assessment. The peaceful political transition and a strong parliamentary majority for the ruling People’s National Congress are seen as positive indicators for policy implementation and economic development.
Fitch’s downgrade of the Maldives’ credit rating to CCC+ underscores the significant challenges facing the nation’s economy, particularly in managing external debt and maintaining liquidity. The Maldives’ ability to navigate these challenges through effective fiscal consolidation and leveraging external support will be crucial in restoring financial stability and improving its credit rating in the future.
