Singapore, May 21, 2020 -- Moody's Investors Service ("Moody's") has today downgraded the Government
of Maldives' long-term local and foreign currency issuer
and the foreign-currency senior unsecured ratings to B3 from B2
and maintained the negative outlook.
The drivers of the downgrade include Moody's expectation that the
ongoing shock to the tourism sector, precipitated by the global
coronavirus outbreak, will significantly impair economic activity
and raise government liquidity risks, exacerbating weak fiscal and
external positions. Moreover, challenges to macroeconomic
stability will persist given limited policy effectiveness and financial
buffers to arrest a significant deterioration in credit metrics.
The coronavirus outbreak, deteriorating global economic outlook,
and falling asset prices are creating a severe and extensive credit shock
across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. Moody's
regards the coronavirus outbreak as a social risk under its ESG framework,
given the substantial implications for public health and safety.
For Maldives, the shock transmits mainly through a collapse in the
country's tourism receipts, which are a vital source of government
revenue and foreign exchange earnings. With existing fiscal weaknesses
and a fragile external position with low reserves coverage of external
debt and import payments, the shock will exacerbate government liquidity
risks. Heightened liquidity risks will in turn intensify external
pressures.
The negative outlook reflects further downside risks to Maldives'
credit profile. A potentially sharper and longer contraction in
economic activity would exert greater pressure on government and external
finances than Moody's currently assume with significant negative
implications for macroeconomic stability. The negative outlook
also relates to limited fiscal space and financing options in the context
of a rising debt burden and sizable financing requirements that may contribute
to higher government liquidity pressures in the coming years, and
especially ahead of a large bond maturity in 2022, even amid an
eventual normalization in economic activity.
Concurrently, Maldives' long-term local-currency
bond and deposit ceilings are lowered to Ba3 from Ba1. The long-term
foreign currency bond ceiling is lowered to B1 from Ba3, while the
foreign currency deposit ceiling is lowered to Caa1 from B3. The
short-term foreign currency ceilings for bonds and deposits remain
Not Prime. These ceilings act as a cap on the ratings that can
be assigned to the obligations of other entities domiciled in the country.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO B3
UNPRECEDENTED SHOCK TO THE TOURISM SECTOR WILL DEPRESS GROWTH, REVENUE
AND RAISE GOVERNMENT LIQUIDITY RISKS
The global coronavirus outbreak has resulted in a severe and unprecedented
shock to the tourism-reliant Maldivian economy. Tourism
accounts for nearly 60% of the Maldives' GDP and is a major source
of government revenue and foreign-exchange earnings. In
2019, travel receipts totaled $3.2 billion (55%
of estimated 2019 GDP) [1].
Moody's forecasts economic activity will contract by over 10%
in 2020, even assuming a gradual resumption in tourism activity
in late 2020.
The economic shock places substantial pressure on government finances
and raises government liquidity risks. Moody's expects a
sharp increase in Maldives' gross financing needs in 2020,
to 15-20% of GDP, driven by a sharp increase in the
government's fiscal deficit to over 13% of GDP in the current
year and remaining above 10% of GDP through 2022.
Once the most acute phase of the shock has passed, Moody's
expects the government to gradually resume its large spending on infrastructure
development in 2021, targeted at improving Maldives' economic competitiveness,
particularly in the tourism sector, enhancing the basic provision
of services, including water and sanitation, and facilitating
population resettlement. This spending will keep fiscal deficits
elevated, leading to additional borrowing that will increase Maldives'
debt burden to over 75% of GDP by 2020-21, from an
estimated 60% of GDP as of end 2019[2].
While Moody's expects the government will continue to seek various
sources of financing from bilateral and multilateral lenders, the
amounts to finance are relatively large for a small economy without a
strong track record of securing external financing.
Moody's expects the government to increase its treasury bills issuances
in the domestic market, while secure sources of external financing
remain limited and the likelihood of an external financing gap in the
current year remains. Should the government refinance external
debt domestically, this would dent foreign exchange reserves further,
potentially placing greater pressure on the managed exchange rate.
Moody's does not currently expect Maldives to participate in any debt
relief initiative that would require the participation of private sector
creditors. A decision to do so could carry negative implications
for the country's rating.
Proceeds from the Sovereign Development Fund (SDF), the liquidity
buffer established to repay the upcoming $250 million sovereign
bond in 2022, can partially offset the current year's financing
gap. However, significant drawdowns in this liquidity buffer
would raise rollover risks ahead of the sovereign bond's maturity.
Moreover, future accumulation of liquid assets in the SDF will depend
on future tourism receipts.
Moody's expects government liquidity risks to remain elevated even
after tourism and economic activity normalize. Large external borrowing,
contingent liability risks from government guaranteed debt, and
weak institutional capacities and budgetary planning processes will continue
to exacerbate fiscal and liquidity weaknesses.
PRESSURE ON FOREIGN EXCHANGE RESERVES RAISE EXTERNAL VULNERABILITIES
Maldives' external position is characterized by wide current account
deficits of over 20% of GDP in recent years[3], driven
by large imports for capital investments and the high import-content
of tourism activity. While a mix of foreign direct investment (FDI)
and debt inflows partially finance wide current account deficits,
external debt levels have continued to increase, mainly related
to ongoing infrastructure development.
Moody's expects Maldives' current account deficit to be around
18% of GDP in 2020, with a slowdown in construction-related
capital goods, tourism-related imports, a lower oil
import bill and a reduction in investment income debits from foreign operators
of tourism companies, preventing a further widening as export receipts
from tourism collapse.
Notwithstanding the slight narrowing of the current account deficit compared
to last year, Moody's expects greater pressure on Maldives'
balance of payments given lower financing inflows. Notably,
FDI inflows will decline due to stalling tourism activity. While
the government has secured approximately $30 million under the
IMF's Rapid Credit Facility and is seeking an additional financing
from the World Bank and Asian Development Bank, amounts secured
thus far are narrower than total external financing requirements,
which would pressure foreign exchange reserves further.
Foreign exchange reserves have increased to around $890 million
as of end April from around $750 million as of December 2019,
in part owed to the Maldives Monetary Authority (MMA) securing a $150
million swap line from the Reserve Bank of India. Net of MMA's
short-term liabilities, foreign exchange reserves stood at
just $230 million[4], well below the levels required
to cover external debt service and import payments in the upcoming years
in the absence of additional financing inflows.
Overall, Maldives' persistently fragile external position
will continue to pressure macroeconomic stability. With the value
of the Maldivian rufiyaa fixed to the US dollar, the MMA's
ability to respond to rising external imbalances is constrained.
The exchange rate has appreciated in real effective terms over the last
twelve months, and growing depreciation pressure could raise capital
outflows or lower inflows, raising external vulnerability risks
further.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects risks that a sharper contraction in economic
activity, depending on the pace and extent of resumption in international
tourism, would exert greater pressure on the government's
and external finances with significant negative implications for macroeconomic
stability.
The negative outlook also reflects limited fiscal space and financing
options in the context of a rising debt burden and sizable financing requirements
that may contribute to higher government liquidity pressures than Moody's
currently expects in the coming years, even amid an eventual normalization
in economic activity.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are material to Maldives' credit profile
with climate change threatening lives and livelihoods. Maldives
is particularly vulnerable to climate change, with its average ground
level elevation being only 1.5 meters, or less than five
feet, above sea level. 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.
Social considerations are a material credit consideration. Moody's
regards the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
As explained, for Maldives, the shock transmits mainly through
a collapse in the country's tourism receipts, which are a
vital source of government revenue and foreign exchange earnings.
More generally, 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 women
participating in the workforce.
Governance considerations are material for Maldives, as reflected
in Moody's assessment of its institutions and governance strength.
Moody's assessment takes into account 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
While an upgrade is unlikely in the near term given the negative outlook,
Moody's would likely consider stabilizing the outlook if access
to external and domestic funding sources looks increasingly secure,
reducing government liquidity risk.
Particularly as it relates to external financing, greater certainty
over multilateral financing flows from a variety of lenders at affordable
rates that cover the sovereign's funding needs durably would support
stabilizing the outlook. Such an outcome, combined with steps
towards improving public financial management, would improve visibility
and planning around the government's borrowing requirements.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
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.
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 Moody's concludes
is likely to entail losses for private sector creditors would be negative
for the rating.
GDP per capita (PPP basis, US$): 21,874 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.9% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -0.9%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -4.7%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -26.1% (2018 Actual)
(also known as External Balance)
External debt/GDP: 49.3% (2018 Actual)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 18 May 2020, 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 has become more susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/research/Sovereign-Ratings-Methodology--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.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions in the disclosure form. Moody's Rating Symbols and
Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for
Designating and Assigning Unsolicited Credit Ratings available on its
website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social and
governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed by
Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main
60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's office
that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] Maldives Monetary Authority, 14-May-2020
[2] Ministry of Finance, Maldives Monetary Authority,
14-May-2020
[3] Maldives Monetary Authority, 14-May-2020
[4] Maldives Monetary Authority, 14-May-2020
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Michael Higgins
Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
