Moody's retains Maldives rating at Caa2 with negative outlook

Moody’s Ratings on Tuesday confirmed the Maldives’ long-term local and foreign currency issuer ratings at Caa2 with a negative outlook.

This announcement concludes a review for downgrade initiated on September 11.

Concurrently, Moody’s confirmed the long-term foreign currency-backed senior unsecured rating for Maldives Sukuk Issuance Limited at Caa2 with a negative outlook. Maldives Sukuk Issuance Limited is a special-purpose vehicle wholly owned by the Ministry of Finance on behalf of the Government of Maldives. Moody’s views its debt and trust certificate issuances as obligations of the Government of Maldives.

Moody’s explained that the decision to confirm the rating reflects the materialisation of a sizeable currency swap arrangement with India, which demonstrates continued access to bilateral financing. The arrangement, alongside new foreign currency regulations and tax reforms, has improved the prospects for an accumulation of foreign exchange reserves. Additional reserves in the Sovereign Development Fund (SDF) also support external debt repayments. At the conclusion of the review, Moody’s assessed that the Maldives’ credit profile aligns with a Caa2 rating.

However, Moody’s highlighted continued external liquidity risks as the basis for the negative outlook. According to the announcement, foreign exchange reserves remain low relative to substantial external debt obligations over the next 12-18 months.

“Large twin deficits and excess domestic liquidity will continue to put pressure on limited reserves. Despite the introduction of substantial reforms, implementation and efficacy of these measures in mitigating such pressure – in time to comfortably address sizeable external liquidity needs – remain uncertain,” the statement said.

Moody’s noted that in September, the Maldives secured a $400 million currency swap agreement with India, alongside 30 billion Indian rupees. Withdrawals from the dollar facility contributed to a rise in foreign exchange reserves, which reached $607 million in October, covering approximately 2.2 months of imports. This recovery followed a low of $364 million recorded a month earlier. Additionally, the SDF held approximately $220 million as of November 14, providing further relief for near-term liquidity pressures.

Authorities have introduced various measures to increase dollar inflows, including new foreign exchange regulations requiring tourism operators to convert dollars to Maldivian rufiyaa with local banks. Dollar-denominated airport taxes and fees have been increased, and the tourism goods and services tax is set to rise to 17% in June 2025.

Despite these measures, the Maldives faces significant external debt obligations amounting to $600-700 million in 2025 and around $1 billion in 2026, including a $500 million sukuk maturing in April 2026. Moody’s observed that reserves net of pre-determined short-term liabilities were negative in October, underscoring the repayment challenges ahead.

The absence of a comprehensive financing package remains a concern. Moody’s expects twin deficits to persist over the next one to two years, leading to continued pressure on foreign exchange reserves. The fiscal deficit is projected to narrow only modestly, from an estimated 12-13% of GDP in 2024 to around 7-8% over 2025-2026. Capital spending under the Public Sector Investment Program is expected to remain elevated, driving current account deficits of 13-15% of GDP over the same period.

Governance risks were also cited, particularly with respect to fiscal management. Moody’s noted some recent progress in improving fiscal transparency and addressing corruption.

Moody’s indicated that greater certainty over external financing flows and effective implementation of fiscal reforms could stabilise the rating. Conversely, a downgrade could occur if access to external financing weakens or if fiscal reforms fail to address liquidity pressures.