Moody's complete periodic review, maintains Maldives' credit rating with stable outlook amid debt concerns

Moody's Ratings, formerly known as Moody's Investment Services on Thursday has completed its periodic review of Maldives' credit rating on June 20, 2024, said that the last Caa1 rating issued for the country is still stable despite debt concerns.

The periodic review, which reassess the appropriateness of last issued ratings based on relevant principal methodologies and recent developments, is not an announcement of a credit rating action, said Moody's before summarising its key considerations in its statement issued yesterday.

The main points highlighted in the statement detail that Maldives and Maldives Sukuk Issuance Limited ratings remain at Caa1 and that the country's outlook remains stable. It reads that Maldives' credit profile is supported by the country's tourism sector which made a quick rebound after the Covid-19 pandemic.

"Twin fiscal and current account deficits and a ramp-up in external borrowing with the implementation of large public-sector infrastructure projects drive government liquidity and external vulnerability risks, while further credit challenges stem from weaker institutional capacity and significant exposure to environmental risks," the statement further details.

Addressing the country's sizeable external debt, Moody's described it as a key concern and one that would "test Maldives' ability to access international markets and financing from bilateral and multilateral creditors to either refinance or repay" debts.

However, the review said that Maldives could ease its external financial needs with stronger foreign currency revenue generation and cuts to capital spending, adding that Maldives' efforts towards reforms and evidence that the country can pay or refinance its significant external debts such as the USD 500 million sukuk due in 2026 comfortably would determine the result of their default risk assessment.

Among other risk factors, Moody's underscored the country's vulnerabilities to environmental and fiscal challenges.

"Maldives' economic strength at "ba1" takes into account the economy's relatively weak global competitiveness outside of the tourism industry, as well as incorporating the possibility of significant economic loss stemming from Maldives' exposure to natural disasters and climate change."

Additionally, Moody's maintains that the country's institutions and governance strength, which is currently at 'b2' reflects the challenges its faces in developing institutional quality, considering the geographically dispersed small island nature of Maldives.

"Maldives' fiscal strength at "caa3" takes into account the significant deterioration in fiscal metrics driven by the pandemic shock. The pace of fiscal consolidation will depend on reform commitment, especially given rigidities in subsidy and capital spending. The "caa" susceptibility to event risk score is driven by government liquidity risk which reflects the government's large gross borrowing needs, as well as refinancing risk related to sizeable short-term domestic debt," Moody's statement reads.

Detailing its stance of Maldives' high exposure and vulnerability to environmental and social risks, Moody's said that "social risks are driven by demographic challenges, manifest in a dearth of skilled labor and technical capacity given the small and dispersed population."

As such, large wealth gaps, paired with inclusion issues, directly contribute to significant levels of youth unemployment and low female labour force participation rates, said Moody's.

The periodic review also determined that despite the current situation, risks to the country's credit profile are balanced and that improving tourism and recent efforts to reform tax would support fiscal consolidation while sustained fiscal improvements and diversification of economic growth could potentially increase the country's future potential rating.

However, failure to service its external debts and prolonged weak tourism activity, could also potentially downgrade the country's credit rating as well.

While Moody's foresees a possible upgrade in the country's ratings if favourable conditions are met, the Maldives government, in is press statement also issued yesterday, said that it recognises the urgent necessity of fiscal reforms.

"The government is actively taking steps aimed at achieving macro-fiscal stability," Ministry of Finance said, adding that Maldives is reassured Moody's assessment is in alignment with the fiscal reform agenda endorsed by the Cabinet this week which "necessitates the government to attain multilateral and bilateral financing at favourable terms, to ensure debt sustainability in the medium term."

As such, the government reaffirmed its commitment to meeting all of its debt obligations and said that it is confident that the positive outlook on economic performance indicators and the successful implementation of the fiscal reform agenda would stand favourable in future rating assessments.

This comes at a time when the Maldivian government is set to implement serious cost cutting measures including slimming down its list of political appointees and holding back on celebratory events, as announced by President Dr Mohamed Muizzu on Thursday night.