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Moody's downgrades Maldives from 'B2' to 'B3', outlook negative

Ahmed Aiham
24 May 2020, MVT 12:17
An aerial view of Male City, the capital island of Maldives. PHOTO: SHAHEE ILYAS
Ahmed Aiham
24 May 2020, MVT 12:17

Moody’s Investment Service (Moody’s), one of the world's top credit rating agencies, downgraded Maldives' long-term foreign and local currency issuer, and the foreign-currency senior unsecured ratings to 'B3' from ‘B2’, maintaining the negative outlook.

As revealed by Moody’s, the drivers behind the downgrade include the ongoing repercussions to the tourism sector, as a result of the ongoing COVID-19 pandemic which significantly impaired the country's economic activity and raised government liquidity risks, further exacerbating weak fiscal and external positions.

Moreover, "challenges to macroeconomic stability will persist given limited policy effectiveness and financial buffers to arrest a significant deterioration in credit metrics", said Moody's.

Accounting for a gradual resumption in tourism activity in late 2020, the rating agency forecasts a contraction of economic activity by over 10 percent within the year.

Once the most acute phase of the financial shocks have passed, Moody's speculates the Maldivian government to gradually resume its large spending on infrastructure development in 2021. As a result, fiscal deficits will elevate, leading to additional borrowing, increasing Maldives' debt burden to over 75 percent of the GDP by 2020-21.

Moody's also noted that government liquidity risks could remain elevated well after tourism and economic activity normalize. "Large external borrowing, contingent liability risks from government-guaranteed debt, and weak institutional capacities and budgetary planning processes will continue to exacerbate fiscal and liquidity weaknesses".

Ministry of Finance projected that the state deficit would reach MVR 13 billion this year, as a result of economic repercussions caused by the global COVID-19 pandemic.

The Ministry's paper on the economic and fiscal situation of Maldives due to the coronavirus crisis, which was compiled with the help of Maldives Monetary Authority (MMA), Ministry of Economic Development and Ministry of Tourism, detailed five scenarios on the economical outcomes of Maldives due to COVID-19.

According to Minister of Finance Ibrahim Ameer, it is believed that Scenario 3 is most likely to be realised, which projects the budget deficit to reach 13.7 percent (MVR 13 billion), compared to the MVR 5.9 billion originally stated in the 2020 State Budget.

The scenario also projects the total state debt sans guarantee to increase to MVR 70 billion, which accounts for 86.6 percent of Gross Domestic Product (GDP). An overall 115 percent drop is projected in the GDP, along with 81.3 percent for nominal GDP.

As over 70 percent of the country’s GDP is attributed to revenue generated by the tourism industry, the economy continues to face severe repercussions due to travel restrictions imposed over the COVID-19 outbreak. It is estimated that the country will face a shortfall of approximately USD 450 million (MVR 6.9 billion) in foreign currency.

In a bid to counteract the financial impact of the COVID-19 pandemic on the local economy, the government has introduced a financial relief package with MVR 2.5 billion intended to prevent the closing down of local businesses and the loss of jobs.