Fitch assigns stable outlook rating for Maldives

Global credit rating agency Fitch Ratings has assigned a long-term foreign and local currency issuance rating of B+ to the Maldives, representing a stable outlook with balanced upside and downside risks.

The rating reflects “strong GDP growth and high government revenue generated by a prosperous tourism sector” weighed against a high debt burden and low foreign currency reserves.

The high dependence on tourism “causes volatility in economic metrics, such as GDP growth” and makes the country vulnerable to “external shocks and domestic developments that undermine the Maldives’ attractiveness as a tourist destination,” Fitch Ratings said Monday.

Such events could include “the emergence of political instability in an already-polarised environment or security issues.”

Fitch is the second of the top three rating agencies in the world to assign a sovereign credit rating to the Maldives. Moody’s was enlisted in September ahead of a move to sell US$200 million worth of sovereign bonds in the international financial market this year.

Opposition figures have expressed concern about the foray into the global bond market. Former Auditor General Niyaz Ibrahim, who went into exile after appearing on an Al Jazeera corruption expose, told the Nikkei Asian Review in March that official statistics cannot be trusted “because the numbers are made public to give a positive image of the president.”

He added: “This is what is worrying about the sovereign bond.”

Notwithstanding volatile GDP growth in recent years due to the dependency on tourism, Fitch predicted growth to pick up to four percent in 2017 with new resorts due to open and a boom in construction.

An ambitious infrastructure scale-up presently underway includes expansion of the airport and construction of a bridge to connect the capital with a new urban centre under development in Hulhumalé.

“Some of these projects seem to have the potential to facilitate a surge in tourism in a few years, but execution of so many large projects at the same time has posed serious fiscal challenges,” Fitch observed.

Measures to “avoid a blow-out of government debt” were laid out in the 2017 budget by increasing revenue and cutting expenditure, Fitch noted.

But the agency cast doubt on the target of reducing the deficit from 7.4 percent in 2016 to 0.5 percent this year. Fitch suggested that the remedial action would lower the deficit to 4.3 percent of GDP.

“On the basis of the government’s announced measures and Fitch’s nominal GDP forecast, the agency expects general government debt/GDP to fall gradually from 72.3% in 2017 to 70.0% in 2020,” it added.

“At the same time, risks to debt sustainability remain and the stabilisation of debt, assumed by Fitch, depends on the government’s willingness and ability to follow through on its fiscal consolidation plan.”

The International Monetary Fund warned last year that the Maldives is now facing “a high risk of external debt distress” due to financing the large increases in capital spending entirely with external loans.

The IMF and the World Bank predicts debt to reach 121 percent of GDP by 2020.

Fitch also observed that “the level of gross foreign reserves is very low”. The usable reserve was US$224.7 million at the end of March. But the risks are “mitigated by the persistent current account deficits being fully financed by foreign direct investment and by the tourism sector both earning and spending in US dollars.”

“This implies that tourism-related outflows should also fall in the case of a sudden drop in tourism-related inflows. In addition, the country has managed with similarly low levels of foreign-exchange reserves for a number of years without experiencing an exchange-rate shock,” Fitch said.

“However, foreign-debt financing of the large construction projects will increase the importance of foreign-reserve buffers in the years ahead.”

Briefing the press Tuesday about the credit rating, Finance Minister Ahmed Munawar said the low reserve is not too worrying for a “highly dollarized economy” such as the Maldives.

Foreign direct investment, which stood at US$400 million last year, will plug shortfalls, he suggested.

Munawar also defended the government’s accumulation of debt to finance the infrastructure scale-up as “necessary investments” with longer-term payoffs.

“Overall I would say that the rating the Maldives has got because of these economic changes is a very good rating. The aim of the government and the ministry is to work towards improving the rating further,” he said.

According to Fitch, the Maldives’ GDP per capita of US$9,145 and revenue ratio of 35 percent is higher than the B category median.

In a statement Tuesday, the finance ministry acknowledged the downside risk factors identified by Fitch such as high debt and dependency on tourism.

“The government is facilitating the diversification and expansion of the economy with a legal framework more conducive to foreign investments through Acts such as the Special Economic Zones Act,” the ministry said.

“With these measures the Maldives is attracting more foreign direct investments, which is in turn strengthening our reserves position. With the recognition of the need to manage the risks inherent in the buildup of public debt for the ongoing infrastructure scale up, the government has established the Sovereign Development Fund to build savings of the government to service the debt.”