One of the world's largest credit rating agencies, Moody's has maintained the Maldivian government's long-term local and foreign currency issuer rating at 'Caa2' and determined the outlook as "negative".
In the rating report issued on Tuesday, Moody's stated that this is the final result of the review conducted on 11 September 2024, to downgrade the Maldives' rating.
In the statement issued after completing the review, Moody's said that the establishment of a large currency swap arrangement with India demonstrates the availability of financial assistance from India to the Maldives. They also believe that the introduction of foreign exchange regulations and tax reforms may improve opportunities to increase foreign exchange reserves. Further, Moody’s highlighted that additional reserves in the Sovereign Development Fund (SDF) could help in servicing external debt.
Moody's said that at the conclusion of the review period, they consider the Maldives' credit profile to be consistent with the Caa2 rating.
Shedding light on the economic future of the island nation, Moody's stressed that the risk of foreign currency shortages for the Maldives remains high. They noted that while significant external debts need to be serviced in the next 12-18 months, foreign exchange reserves are at a very low level. Moody's has said that with increasing debt and difficulties in domestic revenue generation, reserves will continue to face pressure.
The report highlighted that although significant reforms have been introduced, their effectiveness depends on the level of implementation. Therefore, it was stated that there is no certainty that these measures will reduce the financial pressures facing the Maldives in a timely manner. In addition to this, with limited financial resources, it was mentioned that the Maldives will still face challenges in obtaining funding from bilateral and international sources to increase its foreign reserves.
In Moody's rating, the Maldives' local currency ceiling is maintained at B2 and the foreign currency ceiling at Caa1. The three-notch gap between the local currency ceiling and the sovereign rating reflects the relatively small role of the government in key economic sectors, including tourism, along with weak institutions, limited policy effectiveness, and high reliance on foreign currency due to import dependence.
The two-notch difference between the foreign currency ceiling and the local currency ceiling highlights potential challenges in currency convertibility during periods of foreign currency shortages, particularly the need to maintain sufficient reserves to ensure a stable dollar rate.
Reason for maintaining the Caa2 rating
Moody's said they began reviewing to downgrade the Maldives' ratings due to the significant decline in foreign exchange reserves and to assess opportunities for obtaining external financing to increase foreign currency reserves. The aim was to implement reforms to increase foreign currency revenue in time to prevent a future debt trap.
Moody's notes that in recent months, Maldives achieved some success in obtaining external financing. In September 2024, the Maldives entered into a large currency swap agreement with India, including USD 400 million and INR 30 billion. The dollar facility increased foreign exchange reserves to USD 607 million in October, covering approximately 2.2 months of imports, recovering from a drop to USD 364 million a month earlier. Additionally, with about USD 220 million in the Sovereign Development Fund (SDF) as of November 14, Moody's stated that the increase in foreign currency resources would ease short-term foreign currency shortages.
Further, according to Moody’s, the government has taken steps to increase dollar circulation, with the most significant and materially impactful measure being the new foreign currency conversion regulation mandated for tourism operators. Airport taxes and fees collected in dollars have significantly increased, and the Tourism Goods and Services Tax is set to increase by one percentage point in June 2025.
Some of these measures have already been implemented, and Moody's stated that full implementation of these measures by 2025 will pave the way for increased foreign reserves.
However, Moody's believes that foreign currency shortage pressures will remain high over the course of the next 12-18 months due to the need to service large external debts. The government will need USD 600 – 700 million in 2025 and approximately USD one billion in 2026 to service external debt. This includes a USD 500 million Sukuk expiring in April 2026.
Reason for maintaining the negative outlook
Although India's financial assistance provided short-term relief, Moody's stressed that without a comprehensive financing package, there are still risks of the Maldives' rating being downgraded. With debt expected to remain at a significantly high level over the next one to two years, foreign currency needs will remain very high, and if Maldives does not receive adequate foreign currency, the already limited foreign currency resources will further decline, according to Moody's.
Despite numerous measures taken to increase revenue, the recently proposed 2025 budget still shows medium-term expenses at a high level. Moody's notes that capital expenditure for Public Sector Investment Program (PSIP) projects continues to increase. Consequently, capital imports will remain high, leading to an increase in the current account deficit. Moody's estimates that this deficit will remain at a high level of 13 – 15 percent of GDP over the next two years.
