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Thursday December 2nd, 2021
South Asia

Moody’s downgrades Maldives to Caa1, despite tourism recovery

ECONOMYNEXT – Moody’s Investors Service has downgraded Maldives’s sovereign rating to Caa1 from
B3, with a stable outlook, though tourism revenues have started to recover.

The rating agency said tax revenues had fallen further than initially expected and debt had increased during the Coronavirus pandemic, and deficits are likely to be high in the near term with more commercial borrowings.

“The rating also reflects Moody’s expectations that, even with a robust rebound in tourism arrivals in the coming quarters, the debt burden will only gradually decline on expectations that the government will maintain an expansionary, investment-driven fiscal policy that will repeatedly test the government’s access to a diverse set of funding sources,” the rating agency said.

Maldives had got into trouble partly with Chinese debt funded infrastructure and market borrowings which were more accessible in the last decade as the US engaged in ‘quantity easing’.

“The change in the outlook to stable indicates that risks to the Caa1 rating are balanced between these ongoing fiscal pressures with recent positive developments, namely the strengthening prospects of the tourism sector, which will support recoveries in growth and employment.”

Maldives had a successful tax system based on a tourism bed tax which was abolished under Western pressure and replaced with income tax, based on Western socialist ideas such as ‘tax-the-rich’ and ‘income equality’, but can devastate state revenues in a downturn and also makes compliance difficult critic say.

The full statement is reproduced below

Moody’s downgrades Maldives’ rating to Caa1, changes outlook to stable

Singapore, August 17, 2021 — Moody’s Investors Service (“Moody’s”) has today downgraded the Government of Maldives long-term local and foreign currency issuer and long-term foreign currency senior unsecured ratings to Caa1 from B3, while changing the outlook to stable from negative.

Moody’s has concurrently downgraded the backed senior unsecured rating for Maldives Sukuk Issuance Limited to Caa1 from B3.

The entity is a special purpose vehicle that is wholly-owned by the Ministry of Finance on behalf of the Government of Maldives and whose debt and trust certificate issuances are, in Moody’s view, ultimately the obligation of the Government of Maldives.

The downgrade to Caa1 reflects the deterioration of fiscal strength beyond Moody’s initial expectations, stemming from the significant increase in the debt burden during the coronavirus pandemic, the prospect for large fiscal deficits in the coming years, and over time, the risk of higher interest costs associated with the debt burden and greater commercial borrowing.

The rating also reflects Moody’s expectations that, even with a robust rebound in tourism arrivals in the coming quarters, the debt burden will only gradually decline on expectations that the government will maintain an expansionary, investment-driven fiscal policy that will repeatedly test the government’s access to a diverse set of funding sources.

The change in the outlook to stable indicates that risks to the Caa1 rating are balanced between these ongoing fiscal pressures with recent positive developments, namely the strengthening prospects of the tourism sector, which will support recoveries in growth and employment.

The recent refinancing of the Eurobond maturing in 2022 by a sukuk issuance maturing in 2026 and improved foreign exchange liquidity due to the tourism recovery and bilateral support from China, India and others have also mitigated external liquidity risks.

Concurrent to today’s action, Maldives’ local-currency ceiling is lowered to B1 from Ba3 and 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. The foreign currency ceiling is lowered to B3 from B2, underscoring the risks of convertibility restrictions during times of external liquidity stress, particularly to preserve reserve adequacy backing the country’s fixed exchange rate.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Caa1

AFTER SURGING FROM IMPACT OF PANDEMIC, HIGHER DEBT LEVELS WILL ONLY DECLINE GRADUALLY

Maldives’ fiscal metrics have deteriorated sharply over the course of the coronavirus pandemic, which resulted in a 32% contraction in real economic output in 2020 following the closure of borders to tourism from March to July 2020. Although government revenues were resilient, remaining stable at around 27% of GDP in 2020, expenditures expanded to 50% of GDP from 33% in 2019, driven by coronavirus-related relief and continued investment. As a result, Maldives’ debt level rose to double the median of B3- and Caa1-rated peers at 121% of GDP in 2020 from 63% in 2019.

Despite a forecasted rebound in GDP growth to 19% in 2021 and 14% in 2022 as the tourism sector recovers, Moody’s expects the debt burden to moderate only gradually from 117% of GDP in 2021 to 107% of GDP by 2024, under the expectation of continued large, investment-driven fiscal deficits over the medium term.

The fiscal deficit is likely to remain near or above 10% of GDP through 2023, driven in large part by externally funded capital investment projects such as the upgrade to Velana International Airport, road and bridge construction, and other improvements to water infrastructure, health and public housing. The government is also likely to continue investing in infrastructure to improve resilience to the effects of climate change, including rising sea levels. These projects, while additive to the country’s productive capacity, are likely to drive sustained levels of external borrowing.

Fiscal consolidation will be highly contingent on further recovery of the tourism sector, which accounts for approximately 60% of GDP including indirect activities and 30% of government revenue. Although revenues have remained stable as a percent of GDP, debt to revenue surged to 444% in 2020 from 234% in 2019. Moody’s expects this ratio to remain above 400% through 2023, despite baseline expectations of a steady return to pre-pandemic tourism volume within that timeframe. Reopening of the sector is progressing well in Maldives in comparison to many tourism-dependent sovereigns where borders remain closed to leisure travelers, but the sector’s continued recovery will also be conditional upon public health conditions in major source markets including India, Russia, China and Western Europe.

DEBT AFFORDABILITY TO WEAKEN, WITH GREATER EXPOSURE TO MARKET CONDITIONS

While the bulk of external public debt (36% of GDP in 2020) is financed through concessional sources, Moody’s expects a growing portion of future financing needs to come from commercial sources at higher cost. Moody’s assesses that the Maldives will sustain market access, bolstered by the issuance earlier in 2021 of a $200 million sukuk followed by a $100 million tap issuance on the same instrument. However, the higher cost of this borrowing is likely to increase debt service costs, particularly those in foreign currency.

Moody’s forecasts the share of foreign currency denominated debt in Maldives’ larger debt stock to stabilize around 44% over the medium term, higher than 41% before the pandemic, helping to drive the rise in interest payments as a share of revenue to more than 14% in 2022 and to nearly 15% by 2025, compared with nearly 7% in 2019. Foreign currency-denominated interest payments are forecast to increase to 5.4% of total revenue by 2024 from 2.2% prior to the pandemic.

Control on debt affordability will hinge on Maldives’ continued access to low-cost sources of borrowing, including from bilateral and multilateral lenders as well as local sources including the banking system. Moody’s expects ongoing engagement with multilateral development banks to facilitate disbursements for project finance and budget support, including through the forthcoming World Bank Country Partnership Framework for the next four years, although remaining institutional constraints may limit the capacity of such lenders to fully support Maldives’ forecasted financing needs.

RATIONALE FOR THE STABLE OUTLOOK

ON-GOING TOURISM RECOVERY WILL SUPPORT GROWTH AND FOREIGN EXCHANGE LIQUIDITY

Following the closure of borders in 2020, Maldives opened borders to a gradual recovery in tourism, driven by advantageous factors including its unique “one island, one resort” geographic profile and its broad vaccination coverage of the domestic population, with more than 60% at least partially vaccinated as of mid-August 2021. The authorities have also implemented a testing and quarantine requirement for all visitors to guard against imported infection cases. Through July 2021, visitor arrivals to Maldives have already surpassed the level achieved in 2020 and are likely to reach 1.1 million visitors by year’s end, or approximately 65% of pre-pandemic levels.

Moreover, the average number of nights per stay in 2021, as of early August, has increased nearly 40% from 2019 levels, suggesting a faster recovery in resort revenue than visitor arrivals alone suggest. Other metrics including bed capacity and the number of operating resorts indicate limited scarring of the tourism sector.

Moody’s expects broad vaccination in the country to support the ongoing increase in tourism arrivals, reducing downside risks to growth and government revenue in the coming months.

Furthermore, in contrast to other tourism-dependent sovereigns in the Asia Pacific region, the Maldivian authorities are unlikely to impose another full-scale lockdown or border closure, assuming currently available vaccines protect against the prevalent variants of the coronavirus.

Moody’s forecasts annual visitor arrivals to recover to pre-pandemic levels by 2023, helping to drive average real GDP growth of 12% over 2021-2024.

Downside risks to these forecasts stem from uncertain public health conditions in Europe, Russia, India and China, which have been Maldives’ largest source markets for tourism.

For example, the surge in infections in India in the April and May 2021 period led to a decline in tourist arrivals during those months after several months of accelerating arrivals. Moody’s expects Maldives to address these spikes in infections in specific jurisdictions by restricting arrivals or requiring more stringent testing or quarantine requirements on a case-by-case basis.

RECENT REFINANCING AND IMPROVING TOURISM FLOWS WILL MITIGATE LIQUIDITY PRESSURES

The government’s issuance of a $200 million five-year sukuk in March 2021 and subsequent $100 million tap issuance in April alleviated immediate refinancing pressures with the proceeds used to buy back the bulk of its $250 million Eurobond maturing in June 2022 through a tender offer, mitigating a significant source of credit pressure in the near term. Approximately 77%, or $192 million, of the outstanding Eurobond was effectively refinanced to 2026, leaving just $58 million to be repaid in June 2022.

The sukuk helped to diversify Maldives’ investor base and successfully reduced potentially disruptive rollover risk in 2022. The refinancing also reduced the balance that the government plans to draw from the Sovereign Development Fund (SDF) to $58 million from $250 million. The SDF was established specifically to earmark foreign exchange earnings received from tourism-related taxes and fees to amortize the Eurobond at maturity. Moody’s now expects the SDF to comfortably service the remaining Eurobond principal in full, reducing the risk to available foreign exchange reserves.

Moreover, an improvement in tourist arrival volume will help replenish the SDF balance over time and provide liquidity for external debt service through 2026. An active foreign currency swap line with the Reserve Bank of India has also provided a foreign exchange buffer; this access is due to expire at the end of 2021 but may be renewed.


Even with immediate liquidity risks easing, they remain high and contingent upon Maldives’ ability to tap international markets and attract loans and grants from bilateral and multilateral creditors, as Moody’s expects external commercial borrowing to remain a core component of the government’s borrowing strategy.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Maldives’ ESG Credit Impact Score is highly negative (CIS-4) and reflects very high exposure to environmental and social risks. While governance generally remains weak, particularly with regards to fiscal management, recent improvements have been made in the areas of control of corruption and institutional reforms.

Maldives’ exposure to environmental risks is very highly negative (E-5). Environmental considerations continue to threaten lives and livelihoods. With its average ground level elevation being only less than five feet above sea level, Maldives is acutely vulnerable to climate change. Maldives also faces the threat of increasing temperatures, including more frequent extreme weather events, changes in monsoon patterns and coral bleaching.

The government’s approach to improving the archipelago’s resilience to climate change has been to retain and enhance islands’ existing natural flood protection features, strengthen emergency responsiveness, carry out conservation efforts and invest in research capacity. The government is also investing in large land reclamation projects such as the construction of Hulhumalé island to relocate populations most vulnerable to sea level rise. Carbon transition risks are negligible, while Maldives’ natural capital of the archipelago, despite a source of economic concentration, continues to drive its globally competitive tourism industry.

Maldives’ exposure to social risks is highly negative (S-4). Given the small and dispersed population, demographic challenges are also a prevalent concern, manifested in a dearth of skilled labor and technical capacity. According to UNICEF, large wealth gaps also exist between Malé and the atolls. Compounded with inclusion issues, this contributes to relatively elevated levels of youth unemployment and low rates of female labor force participation.

The government continues to invest in building housing developments, as well as improving educational opportunities and outcomes. Access to basic services remains limited outside of the capital city, while health & safety considerations, including mortality rates and levels of undernourishment, are relatively elevated.

Maldives’ institutions and governance profile constrains its rating, as captured by a highly negative governance issuer profile score (G-4). Our assessment considers challenges with respect to fiscal management, although improvements have been made with respect to improving fiscal transparency and increasing budget accountability. Moreover, some progress has been made in addressing other governance issues, including corruption. Tackling financial crimes and money laundering remains a concern.

GDP per capita (PPP basis, US$): 19,609 (2020 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -32.0% (2020 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -1.3% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -22.8% (2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -30.0% (2020 Estimates) (also known as External Balance)
External debt/GDP: 97.7% (2020 Estimates)

Economic resiliency: b1

Default history: No default events (on bonds or loans) have been recorded since 1983.
On 11 August 2021, a rating committee was called to discuss the rating of the Maldives, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer’s susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE

Moody’s would likely upgrade the rating in the event of a sustained improvement in the fiscal trajectory that leads to a significant consolidation of debt and deficit levels, thereby reducing government borrowing requirements and easing liquidity risks and improving the cost of borrowing.

Greater certainty over multilateral financing flows from a variety of lenders at affordable rates that cover the sovereign’s funding needs durably would also support the credit profile. Such an outcome, combined with steps towards improving public financial management, would improve visibility and planning around the government’s borrowing requirements.

Progress toward economic diversification that reduces the sovereign’s reliance on tourism inflows and establishes new drivers of growth that support the development of human capital would also be credit positive.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Moody’s would likely downgrade the rating in the event of a more pronounced deterioration in fiscal and/or external metrics beyond our baseline assumption, including evidence of the government’s weakened ability to secure external financing.

Moreover, a more protracted and prolonged period of weaker tourism activity, leading to more severe impacts on government revenue and foreign exchange earnings, would further threaten macroeconomic stability and likely lead to a downgrade of the rating.

While not Moody’s current expectation, indications that the government is likely to participate in debt relief initiatives which we conclude is likely to entail losses for private sector creditors would be negative for the rating.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

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