Moody’s Investors Service has today assigned first-time local and foreign-currency issuer ratings of B2 to the Government of the Maldives. The rating outlook is stable.
The rating and outlook reflect the following factors:
1) Maldives’ healthy GDP growth prospects, driven by the tourism sector as well as the economic challenges of a small, narrowly diversified economy.
2) Relatively low institutional strength, reflected in governance indicators and the challenges of institution-building following the promulgation of a new constitution in 2008
3) Low fiscal strength, driven by a high general government debt burden that will likely rise over the next 2-3 years as the government embarks on sizeable infrastructure spending
4) Moderate susceptibility to event risks, predominantly driven by domestic politics.
Moody’s has also assigned a Ba1 ceiling for local-currency bonds and deposits, a Ba3 ceiling for foreign-currency bonds and a B3 ceiling for foreign-currency deposits. In addition, the short-term FC bond and deposit ceilings is “Not Prime.”
These ceilings act as a cap on the ratings that can be assigned to the FC obligations of other entities domiciled in the country.
RATINGS RATIONALE
1. Low economic strength given a small, narrowly diversified economy balanced by moderate per capita incomes and a healthy growth path
An archipelago of islands in the Indian Ocean, Maldives has a nominal GDP of just $3.1 billion, making it the 5th smallest of all sovereigns that Moody’s rates, and one of the smallest of B-rated sovereigns.
Expansion in the tourism sector has helped drive robust growth rates in the past, and has driven a tripling of per capita incomes since 1999, to close to $15,000 in 2015, in purchasing power parity terms. Real GDP growth averaged 14.2% between 2006-08, but the shifting composition of tourist arrivals and slowing global demand have resulted in average growth rates moderating to just over 5% between 2010-15. We expect GDP growth in the 3.20-4.5% range over the medium term.
2. Low institutional strength, constrained by an evolving institutional framework and weak governance indicators
Our assessment of institutional strength reflects Maldives’ relatively weak rankings on the World Bank’s Worldwide Governance Indicators, data limitations, and a lack of adherence to budgetary targets. A scarcity of skilled labor also limits institutional capacities. Since the introduction of a new constitution , there have been several sweeping changes to the institutional framework, and several institutions are relatively nascent.
Inflation levels, which inform our assessment of monetary policy credibility and effectiveness, are low but fairly volatile. The monetary authority manages inflation through the imposition of a currency band, and trends have moderated significantly in 2015 to average 1% year-on-year, from 6.2% between 2005-2014.
3. Low fiscal strength, given a high and rising debt burden but strong debt affordability metrics
At 63.6% of GDP in 2015, the government debt burden is significantly higher than peers, and is projected to rise even further, as the government embarks on several large public sector infrastructure projects that are designed to enhance the competitiveness and capabilities of the tourism and aviation sectors. This anticipated rise in debt, coupled with a sizeable proportion of foreign-currency denominated borrowing that subjects debt servicing to exchange rate movements, act as fiscal constraints. However, debt affordability is supported by a large revenue base and predominantly concessional debt.
4. Moderate Susceptibility to Event Risk, driven by domestic political risks
Moody’s assessment of the Maldives’ susceptibility to event risk is driven by domestic political risk. If ongoing tensions continue to escalate, leading to prolonged political uncertainty, the struggle for power between political parties could adversely affect the nature and effectiveness of policies and durably weigh on tourism activity, investment and growth.
Although the government’s gross borrowing requirements are high, government liquidity risks are moderate. Its financing needs are met largely by the domestic financial sector, limiting the reliance on external debt.
Wide current account deficits coupled with generally low foreign reserve levels pose external vulnerabilities, which are alleviated somewhat by a steady inflow of foreign direct investment. The banking system is large relative to GDP and has relatively high levels of non-performing assets. But it is relatively liquid and well-capitalized, and presents low contingent risks to the sovereign.
WHAT COULD MOVE THE RATING UP/DOWN
Credit positive triggers would include (1) A steady reduction in fiscal deficits and the government debt burden; (2) Successful diversification of the economy’s productive base and; (3) a sustained period of political stability that encourages policy continuity and drives structural reform.
Triggers for a negative rating action include (1) A meaningful deterioration in fiscal and debt metrics and worsening debt affordability (2) a shock to the tourism sector, stemming from geopolitical or natural disaster risks that result in a sharp fall in growth (3) an escalation in domestic political tensions that hinder effective policy-making or undermine growth.
GDP per capita (PPP basis, US$): 14,923 (2015 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.1% (2015 Estimate*) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.9% (2015 Actual)
Gen. Gov. Financial Balance/GDP: 6.9% (2015 Revised Estimate*) (also known as Fiscal Balance)
Current Account Balance/GDP: -8.7% (2015 Actual) (also known as External Balance)
External debt/GDP: 29.0% (2015 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
*Government Estimates
On 05 July 2016, a rating committee was called to discuss the rating of the Maldives, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutional strength/ framework, have not materially changed. The issuer’s governance and/or management, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The systemic risk in which the issuer operates has not materially changed. The issuer’s susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
