Moody's downgrades Maldives' credit rating to CAA2

Moody's Ratings (Moody's) has downgraded Maldives' long term local and foreign currency issuer ratings from CAA1 to CAA2, placing the rating under review for further downgrade.

Along with this, they have also downgraded the long-term foreign currency backed senior unsecured rating for Maldives Sukuk Issuance Limited to CAA2 from CAA1 as well. This rating is also marked under review for further downgrades.

A statement issued by the credit rating agency detailed that although Maldives' outlook was previously stable, the decision to downgrade is driven by their assessment that default risks have risen materially, as foreign exchange reserves – even inclusive of assets held in the Sovereign Development Fund – have remained low with prospects for a sharp recovery relatively dim.

"In particular, time for accumulation of foreign exchange resources is narrowing, in light of significant external debt obligations coming due within the next 12-18 months. While the government is working on securing some external financing, comprehensive financing to meet sizeable forthcoming maturities remains uncertain," the statement said.

"At the same time, large twin deficits compound pressures on reserves while implementation of much needed fiscal reforms continue to see delays. Excess domestic liquidity weighs further on limited reserves as the central bank commits additional foreign exchange resources to maintain the peg to the US dollar," Moody's further wrote.

Moody's also highlighted Maldives' governance weaknesses, especially in the country's ability to swiftly adopt measures and mitigate external vulnerability risks, and also touched on the country's limited capacity to reduce excess domestic liquidity. The agency said this speaks to weaker monetary policy effectiveness, which has led to sustained pressure on the peg and foreign exchange reserves.

The agency blamed Maldives' fragile external liquidity position, which they forecast would likely worsen further without near term financing.

"The rating review will focus on assessing whether the sovereign is able to secure external financing – mainly from bilateral sources – to shore up foreign exchange reserves. In turn, this would buy time for the implementation of announced fiscal and monetary measures to raise foreign currency revenue and reduce external liquidity pressures, thereby avoiding default for the foreseeable future," said Moody's.

Last July, Moody's maintained Maldives' credit rating at CAA1 as issued in October 2021. However, this rating dropped owing to the snowballing debt Maldives has accumulated over the years, the USD 600 million debt to be repaid next year, and the USD one billion to be cleared in 2026.

The agency also dropped Maldives' local and foreign currency ceilings to B2 and Caa1 from B1 and B3 respectively.

"The three-notch gap between the local currency ceiling and the sovereign rating reflects the government's relatively small footprint in key sectors of the economy, including tourism, balanced against weak institutions, an unpredictable policy framework, and large external deficits driven by the archipelago's dependence on goods imports," they explained.

"The two-notch gap between the foreign currency ceiling and the local currency ceiling underscores the risks of convertibility restrictions during times of external liquidity stress, particularly to preserve reserve adequacy backing the country's pegged exchange rate."

Maldives official reserves currently stand at USD 444 million, with usable reserves only at USD 61 million, which is about just enough for one month's worth of imports. While this is an 11 percent increase from the previous months, central bank Maldives Monetary Authority (MMA) is working on arranging a USD 400 million currency swap agreement with Reserve Bank of India (RBI).

While this is in the works, Maldives debt is expected to be MVR 129 billion this year.

Along with Moody's Ratings, Maldives has also received a downgraded rating from Fitch, which now stands at a CC, as opposed to the earlier CCC.

At the time Maldives' government assured that recommended action proposed by the rating agencies will be implemented. As of now Maldives is seen to be working towards cost cutting measures within state-owned organisations.