Fitch downgrades Maldives' credit rating to CC

Fitch Ratings has lowered Maldives' credit rating from the previous CCC+ standing to a CC rating, citing a heightened risk of default.

In a statement issued by the global credit rating agency, Maldives' Long-Term Foreign-Currency Issuer Default Rating (IDR) has been downgraded to CC. The agency noted that it typically does not assign outlooks to countries with a rating of CCC+ or below.

Fitch said that this decision reflects Fitch's assessments that intensified pressures from the country's recently deteriorating external financing and liquidity metrics which have made a default event more likely within the rating horizon.

"This is underscored by a recent material decline in the foreign-reserve buffers alongside elevated external debt service and limited external financing inflows," Fitch said.

This marks the second time Fitch has downgraded Maldives' rating this year. The country's rating was first reduced to CCC+ in June after a review of its financial status. Previously, Maldives had only received this rating during the Covid-19 pandemic. Before the pandemic, the country had maintained a B- rating for three years.

This new CC rating represents a three-level drop within just three months and indicates a high level of default risk compared to other issuers or obligations within the same country or monetary union. Although Fitch typically reviews ratings at 12-18 month intervals, extraordinary situations have led to more frequent status changes.

In its statement, Fitch noted that Maldives gross foreign-exchange reserves fell by roughly 20 percent to USD 395 million in July from USD 492 million in May. They highlighted this is this is the lowest level it has been in since December 2016.

"Gross reserves net of short-term foreign liabilities hit a record low of only USD 44 million. The decline reflects persistently high current account deficits (CAD), high external debt service, and the Maldives Monetary Authority's continued interventions to support the currency peg of the Rufiyaa to the US dollar," the statement said.

They also reflected on the rising external debt service, detailing that the government has a USD 50 million sovereign external debt-servicing obligations falling due in the fourth quarter of this year, with an additional USD 64 million in publicly guaranteed external debt.

"The government could use the liquid balance not included in the usable reserves for upcoming debt payments. However, total external debt servicing will increase to USD 557 million in 2025 and exceed USD 1.0 billion in 2026, including repayment of a USD 500 million sukuk," Fitch noted.

Fitch believes the country's current account deficits are on the rise due to the country's substantial public investment and heavy reliance on imports of food, energy and capital goods.

"This has resulted in persistent US dollar shortages, exerting pressures on the parallel market and reserve buffers, since its import cover has traditionally been much lower than in 'B'/'C'/'D' peers. In addition, spillover effects on the banking system have become more prominent in recent weeks, with the banking system's US dollar liquidity tightening considerably," Fitch said.

Fitch said that Maldives could remedy the current situation by opting for currency swap arrangements with strategic bilateral partners to ease the external financing pressure, although it is uncertain whether these will materialise.

"Fiscal consolidation measures, if fully implemented, could also help alleviate the pressures over the medium term. However, we believe large and rising public debt with a lack of meaningful fiscal consolidation will increasingly become a constraint to receiving financial assistance," Fitch said, noting that support from International Monetary Fund (IMF) or other multilateral donors would most likely be contingent on debt restructuring.

This rating change comes as Maldives's government says its is gearing up to implement the long recommended reforms by rating agencies and international financial institutions.

As part of its efforts to address the financial situation, Maldives is working on reducing state expenditure. This includes cutting waste identified in subsidies for fuel, rations, and the government's universal health insurance, Aasandha. Additionally, the country is focusing on increasing its revenue and resolving the current US Dollar shortage, according to the government.

To achieve this, the government has announced plans to increase Airport Development Tax or Airport Development Charge (ADC) as well as the Green Tax starting next year. The government has also decided to expand the tax base and increase dollar revenue by amending laws and regulations to mandate companies earning in foreign currency to pay taxes in dollars.

The Ministry of Finance previously said that USD 500 million is due next year on loans taken by previous governments and that the total debt to be repaid in 2026 will reach USD 1 billion.

Meanwhile, the government is also negotiating to postpone loan repayments to China and India, to whom the owes the largest amounts. President Dr Mohamed Muizzu recently stated that the countries have agreed to defer the repayment of these loans for a later date.