Global credit rating agency Fitch Ratings has affirmed the B+ stable outlook assigned to the Maldives, balancing strong economic growth driven by the tourism sector against a high debt burden and low foreign currency reserves.

One of the top three rating agencies in the world, Fitch assigned a sovereign credit rating to the Maldives in early 2017 after Moody’s was enlisted ahead of a move to sell US$200 million worth of sovereign bonds.

“The Maldives’ strong GDP growth outlook is underpinned by a continued rise in the number of tourists, the construction of new resorts, and investment in some large public-sector infrastructure and housing projects,” Fitch observed in a press release last week.

The agency predicted growth to remain high at 6.5 percent this year, down from 7.6 percent in 2018, “an election year in which construction was particularly strong.”

“Enhanced transparency over the past year regarding the government’s liabilities strengthens policy credibility and is evident from a number of new publications on the Ministry of Finance’s website, particularly on its debt and guarantees,” it added.

Fitch backed the expansion of the Velana International Airport to increase tourist arrivals but cautioned that the dependence on tourism “leaves the country vulnerable to shocks that could undermine prospects for the industry.”

The success of the Maldives as a premier tourist destination was credited for the relatively high GDP per capita of US$11,907, which was well above the median of US$3,489 for countries in the B category.

Tourism directly accounts for 24 percent of GDP, which leaves the economy vulnerable to “sudden events that harm the perception of the Maldives as a safe and desirable destination.” 

While the Maldives scored slightly below peers on the World Bank’s governance indicator, “this is likely to improve in the next few years if the government is successful in reducing corruption.”

Other positive indicators included the easing of political tensions after President Ibrahim Mohamed Solih took office in November and his Maldivian Democratic Party won a super-majority of parliament in April.

Despite the change in government, Fitch expected macroeconomic policy to remain unchanged as the key objectives are facilitating tourism sector growth, expanding infrastructure, and providing social housing.

But the “more left-leaning administration” was expected to focus more on agriculture and small businesses.

“It also aims for a more strategic and transparent approach to public-sector spending by better evaluating project feasibility and through the establishment of a multi-year national development master plan,” Fitch noted.

– Debt and deficit –

Government spending on foreign-financed infrastructure projects is expected to fall from 4.8 percent of GDP in 2018 to an average of 3.6 percent in the next three years.

“Fitch expects general government debt to remain broadly stable in the coming few years around the estimated level of 58.2% of GDP in 2018.”

Government guarantees of the debt of state-owned enterprises stood at 14 percent of GDP by the end of last year, of which about eight percent was debt guaranteed for the Housing Development Corporation.

In March, the HDC was assigned a B+ credit rating with a stable outlook by Fitch.

Public debt rose during the past five years as the previous administration launched several large-scale projects such as the Chinese-funded Sinamalé bridge, fuelling concern over the mounting debt owed to China.

The Export-Import Bank of China holds 40 percent of the Maldives’ external government debt, according to Fitch.

“The government faces high annual external refinancing needs, which represent a vulnerability to the rating, but in our view it should be able to finance its deficit without the issuance of a new US dollar bond, as we expect ongoing bilateral support from the official sector,” Fitch explained, noting that India has pledged US$1.4 billion as budget support, concessional credit lines and a currency swap.

“The government is facing a peak in its external debt service of US$403 million in 2022. Refinancing risk for its two US dollar-denominated bonds, with US$250 million maturing in 2022 and US$100 million in 2023, is mitigated to the extent the government is gradually saving part of its US dollar revenue in a sovereign development fund established specifically for the bond amortisation. The fund contained US$133 million in March 2019, which is not part of the Maldives Monetary Authority’s (MMA) foreign-currency reserves.”

At the end of February, the central bank’s reserve amounted to US$938.6 million, enough for 2.1 months of current account payments. Useable reserves – defined as gross reserves minus short-term foreign liabilities – was even lower at US$295.3 million.

“The risks to external balances are mitigated by the tourism sector both earning and spending in US dollars,” Fitch suggested. “This implies that tourism-related outflows should also fall in the case of a sudden drop in tourism-related inflows. Moreover, much of the flows are settled outside of the Maldives.”