Recently, Maldives’ long-term foreign-currency Issuer Default Rating (IDR) was downgraded by Fitch Ratings from ‘B’ to ‘CCC’. This downgrade comes after a previous downgrade in March, from an IDR of ‘B+’ to ‘B’.
The downgrade caused disagreement from the Ministry of Finance, and also sparked a heated debate between Members of Parliament on Twitter.
Fitch Ratings Inc. is an American credit rating agency, and is considered one of the “Big Three” credit rating agencies. Fitch Ratings’ long-term credit ratings are assigned on an alphabetic scale from ‘AAA’ to ‘D’.
Investment grade
- AAA : the best quality companies, reliable and stable
- AA : quality companies, a bit higher risk than AAA
- A : economic situation can affect finance
- BBB : medium class companies, which are satisfactory at the moment
Non-investment grade
- BB : more prone to changes in the economy
- B : financial situation varies noticeably
- CCC : currently vulnerable and dependent on favorable economic conditions to meet its commitments
- CC : highly vulnerable, very speculative bonds
- C : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
- D : has defaulted on obligations and Fitch believes that it will generally default on most or all obligations
- NR : not publicly rated
According to Fitch, “the downgrade of the Maldives’ IDRs to ‘CCC’ reflects Fitch’s expectation of deeper and more prolonged external liquidity pressures than previously forecast, and a sharp increase in the country’s debt burden as a result of the coronavirus shock and continued debt-funded infrastructure spending.”
The downgrade indicates to potential investors that the Maldives is not a viable investment zone, and that the likelihood of defaulting on debt obligations is higher. The low Fitch rating acts as a deterrent for investors, and in the long-term, this can have devastating consequences for the Maldivan economy.
As a country heavily reliant on external funding, many of the large-scale infrastructure and development projects in the Maldives are made possible through foreign investment. Without sufficient funding, such projects may eventually come to a halt.
Furthermore, local businesses will also suffer as a result of the downgrade. Foreign investment plays a significant role in many sectors of our economy, namely the hospitality industry, which generates the bulk of our GDP. This may also have negative multiplier effects that reverberate across our community.
The Ministry of Finance has vehemently opposed the downgrade, stating that “Maldives has never defaulted on our debt obligations thus far, which is a distinction that we plan to hold into the future. We are fully committed to ensure that principal and interest for our sovereign bonds are paid fully and in a timely manner.”
