Moody’s cuts Maldives credit ratings

Moody's Ratings on Wednesday downgraded Maldives' long-term local and foreign currency issuer ratings to Caa2 from Caa1 and placed the ratings under review for further downgrade, following a similar rating downgrade by Fitch Ratings in August.

Moody's outlook was previously stable.

Additionally, the long-term foreign currency backed senior unsecured rating for Maldives Sukuk Issuance Limited has also been downgraded to Caa2 from Caa1 and placed under review.

Moody’s explained that the downgrade reflects a material rise in default risks due to low foreign exchange reserves and the narrowing time frame for accumulation of foreign exchange resources.

“The decision to downgrade is driven by our assessment that default risks have risen materially, as foreign exchange reserves – even inclusive of assets held in the Sovereign Development Fund – have remained low with prospects for a sharp recovery relatively dim," the rating read. 

Moody’s highlighted that the Maldives faces significant external debt obligations due within the next 12-18 months, with uncertainties surrounding comprehensive financing to meet these obligations.

The agency also noted that the government’s efforts to secure external financing are ongoing, but comprehensive financing remains uncertain.

The decision to place the ratings under review for further downgrade is attributed to concerns over Maldives' fragile external liquidity position, which Moody's believes may worsen without near-term financing.

The review will focus on the government's ability to secure external financing to shore up foreign exchange reserves, allowing time for the implementation of fiscal and monetary measures.

Moody’s also downgraded Maldives’ local and foreign currency ceilings to B2 and Caa1 from B1 and B3, respectively. The agency cited weak institutions, an unpredictable policy framework, and large external deficits as contributing factors to the downgrade.

The agency emphasised that foreign exchange reserves have been on a downtrend over the past year, with reserves at $437 million at the end of August, sufficient to cover only around 1.5 months of imports. This is significantly below the government’s external debt service obligations in the coming years.

Moody’s stated that the ratings would likely be confirmed at their current level if the risk of external debt default diminishes materially and durably.

The ratings may be downgraded further if the government’s ability to service its external debt obligations continues to deteriorate, leading to further erosion of foreign exchange reserves.