Moody’s Downgrades Maldives’ Credit Rating, But Central Bank Remains Confident
Moody’s Investors Service has downgraded the Maldives’ credit rating due to growing concerns about the country’s ability to pay its debts. The credit rating has been lowered from Caa1 to Caa2, indicating a higher risk that the Maldives could struggle to meet its financial obligations.
This downgrade reflects worries about the Maldives’ low foreign currency reserves and large debt payments due in the next couple of years. Moody’s has also put the rating under review, meaning it could be downgraded even further if things don’t improve.
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In addition, Moody’s downgraded the rating for the Maldives Sukuk Issuance Limited—a special entity that issues debt on behalf of the Maldivian government—also to Caa2 from Caa1. This downgrade indicates similar concerns about the country’s financial situation and its ability to meet debt commitments.
What Does Moody’s Credit Rating Mean?
To understand the significance of this downgrade, it’s helpful to know how Moody’s rating system works. Moody’s ratings help investors gauge the risk involved in lending money or investing in a country or company. The ratings range from Aaa, which is the safest, to C, which indicates a high risk of default, meaning the entity may not be able to pay back its debts.
A rating of Caa2, where the Maldives is now placed, falls into the high-risk category. This suggests that the country has a very high risk of failing to meet its debt payments. When Moody’s places a rating “under review for downgrade,” it means there is a chance the rating could be lowered even further if the economic outlook does not improve, signaling even higher risks for investors.
Why Did Moody’s Downgrade the Maldives?
Moody’s downgrade is mainly due to concerns about the Maldives’ low foreign exchange reserves, which are crucial for paying off international debts. As of August 2024, these reserves stood at $437 million—enough to cover only about 1.5 months of imports. This is significantly below what is needed for the Maldives to meet its debt obligations in 2025 and 2026, which amount to over $600-700 million and more than a billion dollars, respectively.
Additionally, Moody’s pointed out weaknesses in the Maldives’ ability to make quick policy changes to address these financial challenges. Delays in implementing necessary economic reforms and difficulties in managing excess money supply are also adding pressure to the country’s financial situation. Moody’s will be watching closely to see if the Maldives can secure more external financing, such as loans from other countries, to boost its reserves and avoid a default.
Maldives’ Central Bank Responds with Optimism
In response to Moody’s downgrade, the Maldives Monetary Authority (MMA), the country’s central bank, has offered a more optimistic view. The MMA projects that the Maldives’ economy will grow by 4.9% in 2024 and 6.5% in 2025, thanks mainly to a strong tourism sector. By the end of August 2024, tourist arrivals had increased by 10% compared to the same period in 2023, with tourists also staying longer.
The MMA also noted improvements in foreign exchange reserves. Gross reserves rose from USD 395 million in July to USD 444 million in August 2024, and net reserves increased to USD 61 million. The central bank believes that, with the inclusion of usable reserves and funds from the Sovereign Development Fund (SDF), the total reserves could surpass the $606 million projected in the government’s 2024 budget.
Steps to Stabilise the Economy
The central bank is taking steps to address the financial challenges highlighted by Moody’s. To help maintain the stability of the exchange rate, the MMA plans to use monetary tools like Open Market Operations to reduce the surplus money supply in the banking system. Changes to monetary regulations are also expected this month to increase the flow of foreign currency into the Maldivian banking system.
Furthermore, the MMA expressed confidence that the government would be able to meet its upcoming debt payments. Specifically, the MMA reaffirmed that the Maldives is fully prepared to make a major bond repayment due in October 2024 and assured that all future debt obligations would be met.
What Lies Ahead for the Maldives?
As Moody’s reviews the Maldives’ rating, it will be crucial for the country to secure additional external financing to strengthen its foreign exchange reserves. The government has already announced measures to raise more foreign currency, such as increasing airport taxes, green tax rates, and introducing import duties and income taxes in US dollars. If these steps are successfully implemented, they could help reduce the need for external loans and improve the country’s financial stability.
While Moody’s downgrade reflects significant financial challenges for the Maldives, the central bank’s response indicates a plan to navigate these hurdles. The coming months will be critical in determining whether the Maldives can secure the necessary funds and implement effective policies to avoid further financial difficulties.
