Fitch revises Maldives’ credit rating to ‘CC’

Fitch Ratings has downgraded Maldives’ credit rating from ‘CCC+’ to ‘CC’, assessing that there is an increased risk of default.

The top global credit rating agency announced the change in the Long-Term Foreign-Currency Issuer Default Rating (IDR) for the Maldives in a statement on Thursday.

Fitch said that the key factors driving its decision includes an increased risk of default, falling gross foreign exchange reserves, rising external debt service, public debt vulnerabilities, and uncertainties surrounding the government’s medium-term financing plan.

Increased Risk of Default:

Fitch asses that intensified pressures from the country's recently deteriorating external financing and liquidity metrics have made a default event more likely within the rating horizon.

The agency said that this is underscored by a recent material decline in the foreign-reserve buffers alongside elevated external debt service and limited external financing inflows.

Falling Gross FX Reserves:

The Maldives' gross foreign-exchange (FX) reserves plunged by roughly 20 percent to USD 395 million in July 2024 from USD 492 million in May 2024, marking the lowest level since December 2016. Gross reserves net of short-term foreign liabilities hit a record low of only USD 44 million.

Fitch assesses that the decline reflects persistently high current account deficits (CAD), high external debt service, and the Maldives Monetary Authority (MMA)'s continued interventions to support the currency peg of the Rufiyaa to the US dollar.

Rising External Debt Service:

The Maldivian government has USD 50 million in sovereign external debt-servicing obligations falling due in Q4 2024 and USD 64 million in publicly guaranteed external debt.

The Sovereign Development Fund holds a cash balance denominated in US dollars of about USD 65 million, up from USD 54 million in mid-June.

Fitch said that while the government could use the liquid balance not included in the usable reserves for upcoming debt payments, the total external debt servicing will increase to USD 557 million in 2025 and exceed USD 1.0 billion in 2026, including repayment of a USD 500 million sukuk.

External Imbalances; Liquidity Constraints:

Fitch expects the Maldives' CAD to remain high over the short to medium term, due to the country's substantial public investment and heavy reliance on imports of food products, energy and capital goods.

The agency noted that this has resulted in persistent US dollar shortages, exerting pressures on the parallel market and reserve buffers.

 It also found that the spillover effects on the banking system have become more prominent in recent weeks, with the banking system's US dollar liquidity tightening considerably.

Reliance on Support and Reforms:

Fitch said that while FX swap arrangements could be made with strategic bilateral partners to ease the external financing pressure, it is uncertain whether these will materialize. And, fiscal consolidation measures, if fully implemented, could also help alleviate the pressures over the medium term.

But the agency believes that a large and rising public debt with a lack of meaningful fiscal consolidation will increasingly become a constraint to receiving financial assistance. It assesses that support from the International Monetary Fund (IMF) or other multilateral donors would most likely be contingent on debt restructuring.

Uncertainties in Medium-Term Financing Plan:

Fitch said that it sees a rising degree of uncertainty surrounding the government's plan to access the market and partly refinance the USD 500 million sukuk in 2025, in addition to near-term external liquidity strains. The government also aims to accumulate more foreign-currency tourism revenue in the Sovereign Development Fund through various policy initiatives.

However, the agency believes that challenges remain for the government to draw about USD 200 million from the fund for partial repayment of the sukuk in 2026, as it intends.

Public Debt Vulnerabilities:

Fitch projects the Maldives' elevated general government debt/GDP ratio – which was estimated at 109.4 percent at end-2023, excluding government-guaranteed debt - will further increase over the medium term, well above the projected median level.

The agency said the assessment is based on its assumption of slower fiscal consolidation than outlined in the official medium-term fiscal strategy.

The public debt burden would continue to rise in the absence of tangible and sustained progress in revenue mobilization and expenditure rationalization over the medium term, it said.