Written by Zulfick Farzan
29 Oct, 2021 | 9:47 am
Fitch Ratings has upgraded the Maldives’ Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘CCC’. The Outlook is Stable.
KEY RATING DRIVERS
The upgrade of the Maldives’ IDRs reflects a stronger recovery for the tourism sector than we previously expected, and an improved, though still challenging refinancing outlook for the sovereign’s external debt over the next few years.
Tourist arrivals so far in 2021 have rebounded sharply to around 70% of pre-pandemic levels, and the number of bed nights has recovered even faster, with tourists on average tending to stay around three days longer than in the past. In our baseline scenario, we assume a gradual further normalisation of tourist arrivals to over 80% of pre-pandemic levels in 2022 and to around 100% in 2023.
Risks to the tourism outlook mainly relate to the evolution of the Covid-19 pandemic. The opening up of borders globally could lead to both more tourism demand and more competition from other destinations. Meanwhile the emergence of new Covid-19 variants could disrupt travel, such as when the Maldives temporarily closed its borders to travellers from the rest of South Asia after the rapid spread of the Delta variant in May and June 2021, during which total arrivals fell by around 40% from the average arrivals of the previous months.
Near-term risks surrounding the sovereign’s ability to meet its external debt service have declined after the issuance of a sukuk due in 2026, with part of the proceeds used to buy back the majority of a US dollar bond that will mature in July 2022. The transaction has alleviated the government’s debt maturity profile through 2025, but refinancing risks remain. With yields on the USD500 million sukuk at around 10%, we expect the authorities will remain dependent on bilateral and multilateral sources of financing. The government has USD244 million in external debt service obligations falling due in 2022, against our forecast for foreign-exchange reserves of USD745 million. Some of the USD205 million in government-guaranteed debt maturing in 2022 could also crystallise on the sovereign balance sheet.
The ‘B-‘ IDR also reflects the following factors:
Fitch forecasts GDP growth of 29.4% in 2021 and 10.0% in 2022, largely reflecting a low-base effect from contraction by 33.5% in 2020, one of the sharpest drops globally. We believe the recovery is likely to be gradual, but prospects for luxury tourism in the Maldives over the medium term should continue to be strong. The development of a new terminal at the main international airport, in particular, should allow for a significant increase in the number of tourists over the coming years, while new resorts are also being built.
A combination of high public debt, weak foreign-exchange buffers and a strong dependence on tourism, leaves the Maldives vulnerable to shocks, and uncertainty about the evolution of the coronavirus pandemic persists.
The rise in the Maldives’ government debt/GDP ratio to 115.6% in 2020 from 62.9% in 2019 was among the largest increases from the pandemic globally. We forecast government debt to fall to 107.6% of GDP in 2021, as GDP recovers from the pandemic shock, but remain broadly stable in the following few years, as growth rates will slow and primary deficits stay large. This is well above the ‘B’ category median of 67.7% of GDP in 2021. In addition, the Maldivian government’s guaranteed debt amounted to 34% of GDP in 2020, mostly related to housing projects, and up from 15.8% of GDP in December 2019, partially from lower GDP.
We forecast the fiscal deficit to gradually narrow to 15.5% of GDP in 2021 and 11.6% in 2022, from 23.5% in 2020, broadly in line with the targets in the government’s medium-term fiscal strategy. Expenditure will likely decline only gradually, in particular as the authorities continue to focus on debt-funded infrastructure development. The government aims to secure external financing before executing these projects. Projects that are ongoing or in the pipeline include housing, international and regional airport and port development, and bridge construction.
The government’s current expenditure is subject to risks from high oil import prices and spending pressures from the next presidential elections in 2023. The government aims to reduce its deposit overdrafts from the Maldives Monetary Authority (MMA), a monetary financing facility allowing the government access to MVR4.4 billion until April 2022. The MMA had around MVR1.5 billion in loans and advances to the government outstanding in September 2021, down from MVR4 billion (5.3% of GDP) in August, in addition to MVR13.6 billion in treasury bonds. Inflationary pressures from monetary financing and bond purchases have been limited so far, however, given the currency peg and fuel subsidies.
Foreign-exchange buffers have been supported by the sukuk issuance, increasing to USD1,017 million in September from USD874 million in August. We nevertheless expect the foreign reserves to decline in the next few months, as the MMA intends to repay USD250 million of a USD400 million swap arrangement with the Reserve Bank of India by the end of the year. Reserves are likely to remain low over the next few years, in particular the reserves net of predetermined short-term drains, which amounted to USD214 million in August. We expect the current account deficit to remain wide at 25.7% in 2021 and 23.7% in 2022. Fitch believes the MMA will continue to intervene in the foreign-exchange market to support the hard peg of the rufiyaa to the US dollar.
The banking system is well-capitalised, with a reported Tier 1 capital/risk-weighted asset ratio of 47.21% in 2Q21. Private credit represents only 43% of GDP and a significant proportion of the banking system is foreign-owned, implying that the sovereign’s exposure to banking-sector risk is relatively low. However, dollarisation remains high at 48% of total deposits, which constrains potential sovereign support given the low level of foreign-currency reserves. Non-performing loans were high, at 8.0% of total loans in 2Q21, but down from a peak of 20.9% in 2012.
ESG – Governance: The Maldives has an ESG Relevance Score (RS) of ‘5[+]’ and ‘5’ for Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, respectively. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. The Maldives has a medium WBGI ranking at the 45th percentile, reflecting a recent peaceful political transition, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a high level of corruption compared with peers.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– External Finances: Heightened external liquidity pressures, as a result of a fall in foreign-currency reserves or increasing difficulties in refinancing external maturities.
– Public Finances: A sustained rise in general government debt or government guarantees to state-owned enterprises, e.g. due to a prolonged economic downturn or a rise in public investment spending.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– Public Finances: A reduction in the public-debt burden over the medium term, closer to peer levels, for instance from fiscal consolidation or better growth prospects.
– External Finances: Strengthening of external buffers through accumulation of foreign-currency reserves.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns the Maldives a score equivalent to a rating of ‘CCC+’ on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:
– Structural: +2 notches, to adjust for the negative impact of the SRM of the Maldives’ take-up of the Debt Service Suspension Initiative (DSSI), which prompted a reset of the “years since default or restructuring event” variable.
The reset subtracts approximately 2 notches from the model, but we judge that the Maldives’ participation in the DSSI, unlike some other forms of re-structuring, does not signal reduced capacity and willingness to meet obligations to private-sector creditors beyond other factors incorporated in the rating.
– Public Finances: -1 notch, to reflect the risk of large government guarantees crystallising on the sovereign balance sheet, and the presence of non-linear risks from high public debt not fully captured in the SRM.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
The Maldives has an ESG Relevance Score of ‘5[+]’ for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As the Maldives has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
The Maldives has an ESG Relevance Score of ‘5’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As the Maldives has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.
The Maldives has an ESG Relevance Score of ‘4’ for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As the Maldives has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
The Maldives has an ESG Relevance Score of ‘4’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for the Maldives, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
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