Fitch Ratings Inc, one of the world's top credit rating agencies, assigned the Maldives' long-term foreign and local currency issuer default ratings (IDRs) at “B+” for the first time, stating that the archipelago’s credit outlook is stable.
The agency stated that the Maldives is experiencing rapid economic development, increase in Gross Domestic Product (GDP) and high state revenue from the tourism industry which are balanced against the nation’s high government debt and low foreign-reserves. However, Fitch Ratings noted that the Maldives’ main dependency on tourism causes volatility in its economic stability, making “the country vulnerable to external shocks and domestic developments that undermine the Maldives' attractiveness as a tourist destination”.
Highlighting the major development projects launched by the government such as the main airport’s expansion, constructing a bridge linking capital Male with the airport and reclaimed suburb Hulhumale, several housing projects and development of new resorts, Fitch Ratings projected that the Maldives’ GDP will rise from 3.9 percent in 2016 to 4.0 percent this year and 4.5 percent in 2018. However, the organisation warned that undertaking so many infrastructural projects simultaneously also pose a number of fiscal challenges.
Noting that the government’s State Budget for 2017 is structured to minimise state expenditures and significantly increase government revenue to finance the ongoing projects, Fitch proclaimed that the Maldivian state’s aim to decrease fiscal deficit from 7.4 percent of the GDP in 2016 to 0.5 percent this year is bold and ambitious. Fitch Ratings’ estimation of the Maldives’ government debt is a gradual fall in GDP from 72.3 percent in 2017 to 70 percent in 2020.
Most notably, Fitch Ratings stressed the low levels of the Maldives’ foreign reserves, which were recorded at USD 501.2 million by the end of last March, and the even lower usable reserves at USD 224.7 million. However, the organisation noted that the nation has managed with similar low-level foreign-exchange reserves for several years without major exchange-rate shocks, adding that the low foreign reserves are alleviated by foreign direct investments and the USD dollar revenues brought in by the tourism sector. However, Fitch warned that foreign-reserve buffers will be imperative in the future due to the ongoing large projects that are financed by external loans.
“The high dependence on tourism implies the economy is vulnerable to sudden events that harm the perception of Maldives as a safe and reliable tourist destination. Such potential events include the emergence of political instability in an already-polarised environment or security issues,” added the organisation in its statement.
Fitch Ratings have so far deemed that the outlook on the Maldives’ credit rating is stable. It warned that the rating could become negative should there be increases in government debt and balance-of-payment pressures. Conversely, the agency stated that the main factors leading to a positive rating are decreasing government debt, increasing foreign-exchange reserve buffers, and by diversifying the economy instead of depending solely on tourism.
Finance Minister’s comments over Maldives’ first Fitch Rating
Speaking at a press conference held in connection to the Maldives attaining its first credit rating on Fitch Ratings, Minister of Finance and Treasury Ahmed Munawar declared Tuesday that the nation has enough foreign reserves to manage its finances, stating that the Maldives has a “highly dollarized economy”.
Highlighting that Fitch Ratings stated that the low reserves are offset by increasing foreign investments, the minister said that all investments in the Maldives such as resort development are designed to bring in foreign currency to the nation.
“In other words, foreign direct investments are imperative to our economy,” he said, pointing out that the government earned USD 400 million last year from such ventures.
The minister also highlighted Fitch Ratings’ statements that the ongoing major development projects are expected to be beneficial to the Maldivian economy in time.
“Some people say these projects won’t bring any benefit, but here we have an independent report that clearly states that the changes brought about by the government with projects such as the airport expansion or bridge construction will increase the country’s economic progress in the future,” said Minister Munawar.
Moreover, conceding with Fitch Ratings’ warning that the projects financed by foreign loans could pose challenges, the minister asserted that the loans are funding mandatory investments unlike other foreign loans taken by previous administrations.