China-backed Maldives strongman falls amid Sri Lanka-style debt fears

ECONOMYNEXT – Maldives opposition leader Ibrahim Mohamed Solih beat China-backed strongman Abdulla Yameen, who had jailed opposition leaders and Supreme Court judges, in a surprise victory amid Sri Lanka-style debt distress fears.

Under Yameen, relations deteriorated with India, a country which it had good relations since independence, amid greater Chinese involvement in the Maldives.

There have been fears that easy debt taken from China to build infrastructure may de-stabilize state finances, like in Sri Lanka. There was also a sovereign bond issued in 2017.

High Risk

Maldives could be badly hit especially if the currency falls, the International Monetary Fund said.

"A widening current account deficit, low international reserves, pipeline of guarantees, and rapid debt buildup continue to skew the risks to the downside and leaves the country vulnerable to standard shocks, particularly a one-time depreciation and an exports shock," the IMF staff report said.

"In addition, the public debt path is substantially above the prudential benchmark throughout the projection period underscoring a heightened overall risk of debt distress.

"Based on this, it is assessed that the external risk rating for the Maldives’ continues to be rated as "high" risk of external debt distress."

Maldives Monetary Authority had from time to time printed money to finance deficit, putting the currency under pressure, but the economy is also partly dollarized but has generally maintained better policy than Sri Lanka and India.

It growth was underpinned by a relatively strong currency and has the highest per capital income in South Asia.





Managing Infrastructure

The International Monetary Fund estimated that government debt would rise to 72 percent of gross domestic product by 2018, up from 54.2 percent in 2014. Debt had already ratcheted up to 65.7 percent by 2016.

China has been heavily involved in an infrastructure drive. Big developments include an 830 million dollar expansion of the airport and a 400 million dollar road bridge connecting the airport to the capital Male.

"Maldives’ main challenge remains one of balancing a surge in infrastructure investment which has the potential of transforming the economy against the continuing risks stemming from high and rising public debt, the bond redemption in 2022, and the short maturity of domestic debt," the IMF said in its last country report.

There are also new power and water treatment plants.

Maldives main source of income is tourism, where also Chinese tourists have become a key driver taking over from the traditional European visitors.

China is also building an apartment complex.

China is already heavily involved in Burma, Pakistan and Sri Lanka.

India fears Chinese involvement in the Maldives, and relations have deteriorated. Ex-President Mohammed Nasheed has called for Indian military intervention.


India once helped stamp out a military coup in the archipelago.

"In the past decade, China has invested or committed more than $150 billion in the economies of Bangladesh, the Maldives, Myanmar, Pakistan, Nepal and Sri Lanka," Gateway House, an India-based think tank has said.

"China is now the largest overseas investor in the Maldives, Myanmar, Pakistan and Sri Lanka."

"Chinese penetration is the highest in the two economies that flank India – Myanmar and Pakistan – where Chinese money is bolstering governments that face international isolation due to human rights violations and terrorism respectively.

Maldives President Yameen has also come under fire for jailing opponents, declaring an emergency and interfering in the judiciary.

Maldives’ highest court itself has courted controversy in earlier decisions.

China has been investing equity in the countries as debt troubles emerged including by partnering with local investors.

Gateway house said China enters as a military supplier to countries with problems and "then cultivates and partners with local elites, provides modern infrastructure with deferred payments, and entrenches itself."

Sri Lankan companies, which have links with Chinese construction conglomerates have also jointly invested in the Maldives.

China already part-owns a port in Sri Lanka which was leased ostensibly after failing to repay debt.

Sri Lanka has insisted that the port will only be used for commercial activities.

Malaysia’s new Prime Minister Mahathir Mohammed has cancelled several Chinese projects in the country, after defeating his rival amid corruption charges, in a setback to China. (Colombo/Sept24/2018)

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