Fitch Downgrades Maldives’ Credit Rating, Raising Concerns Over Financial Stability

Fitch Ratings, a leading global credit rating agency, has lowered the Maldives’ credit rating from ‘CCC+’ to ‘CC.’ This downgrade signals a growing concern that the Maldives may struggle to pay back its debts in the near future.

What is a Credit Rating, and Why Does it Matter?

A credit rating is like a report card for a country or a company’s financial health. It shows how likely they are to repay borrowed money. The highest rating, ‘AAA,’ means there is very little risk of not paying back the money. The lower the rating, the greater the risk. With this downgrade to ‘CC,’ the Maldives is now seen as having a high chance of not meeting its debt payments.

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Why Was the Maldives’ Rating Downgraded?

The downgrade is due to several financial challenges facing the Maldives:

• Low Foreign Reserves: The Maldives’ foreign currency reserves, which are like a savings account used to pay for imports and settle debts, have dropped significantly. As of July 2024, these reserves fell by around 20% to just USD 395 million — the lowest level since 2016. This means the Maldives has less money available to meet its debt obligations.
• Growing Debt Payments: The Maldives has several large debt payments coming up soon, with USD 50 million due by the end of this year and a total of over USD 1 billion due by 2026. Meeting these payments will be challenging, especially with limited reserves.
• Economic Imbalances: The Maldives spends more on imports (like food and fuel) than it earns from exports, creating a gap known as the current account deficit. This gap has led to a shortage of US dollars in the country, making it harder to manage debt payments.
• Need for International Support: To ease the financial pressure, the Maldives may seek help from international partners or lenders, like the International Monetary Fund (IMF). However, securing such assistance may require the country to restructure its debts or implement strict budget measures.

What Needs to Happen for Improvement?

For the Maldives to improve its credit rating, it would need to increase its foreign currency reserves and show a strong plan to reduce its debt levels. Failure to do so could make it even harder to borrow money in the future or attract investment, which would have a negative impact on the country’s economy.

Why Should This Matter to You?

A lower credit rating can affect everyone in the country. It can make borrowing more expensive for the government, which may then have to cut spending on public services or increase taxes. It also makes the country less attractive to investors, which can slow economic growth and job creation. The downgrade highlights the urgent need for the Maldives to strengthen its financial position to ensure a stable and prosperous future for its citizens.

Maldives Monetary Authority’s (MMA) Response

The Maldives Monetary Authority (MMA) has acknowledged the downgrade by Fitch Ratings and offered an update on the country’s economic outlook and financial strategies:

Tourism and Economic Sectors:

• The tourism sector, a major driver of the Maldivian economy, continues to show growth. Tourist arrivals in August increased by 11% year-on-year, and bed nights from January to July saw a 7% rise. These trends are contributing to a projected GDP growth of 4.9% in 2024, with national productivity expected to reach 6.5% by 2025.
• The opening of the new terminal at Velana International Airport later this year is expected to further boost tourism.

Balance of Payments and Reserves:

• While the Balance of Payments Current Account Deficit was 21.4% in 2023, it is projected to decrease to 19.9%.
• Official reserves, although down, stand at USD 395 million as of July 2024, with usable reserves at USD 45 million. By comparison, reserves, including swaps, were USD 594 million in the same period last year.

Sovereign Development Fund:

• The Sovereign Development Fund’s custodian account increased from USD 5 million in November 2023 to USD 65 million in July 2024. Including usable reserves, the total stood at USD 105 million by July, with projections for total reserves, including sovereign development, to exceed USD 606 million by year-end.

Joint Efforts for Economic Stability:

• The MMA, along with the government, is working on strengthening official reserves through efforts like issuing a refinancing green bond. They are also finalising a USD 400 million foreign currency swap agreement with the Reserve Bank of India under the SAARC framework.

Foreign Exchange and Monetary Policy:

• Surplus liquidity in the banking system, which swelled to MVR 6.7 billion following the pandemic, presents challenges for exchange rate stability. To address this, the MMA is preparing to absorb this surplus liquidity while also adjusting monetary policy to provide relief to commercial banks facing foreign exchange challenges.

Fiscal and Debt Strategy:

• The government’s medium-term fiscal and debt strategy includes measures to reduce expenditures and increase revenues. Despite ongoing challenges, the MMA, Ministry of Finance, and the government are confident that collaborative efforts with financial institutions will help achieve the desired financial stability.

By focusing on these initiatives, the Maldives aims to tackle its current financial difficulties and lay the groundwork for economic recovery and long-term growth.