Moody's Investors Service has downgraded the Maldives' long-term local and foreign currency issuer ratings from CAA1 to CAA2, placing the country under review for further potential downgrades. This move also affects the long-term foreign currency-backed senior unsecured rating for Maldives Sukuk Issuance Limited, which has been downgraded to CAA2 from CAA1, similarly flagged for further review.
Reasons for Downgrade
In a statement, Moody's attributed the downgrade to an increased risk of default, citing persistently low foreign exchange reserves and dim recovery prospects. Even with assets held in the Sovereign Development Fund, reserves remain inadequate, creating significant pressure as external debt obligations loom over the next 12 to 18 months.
“The time for the Maldives to build up foreign exchange resources is rapidly shrinking, with substantial debt repayments approaching. While the government is seeking external financing, the chances of securing enough funds to meet these obligations remain uncertain,” Moody's noted.
Economic and Fiscal Strain
In addition to low reserves, large fiscal deficits are compounding the pressure on the Maldives' economy. The Maldives Monetary Authority’s (MMA) efforts to maintain the rufiyaa's peg to the US dollar have further strained reserves, and delays in crucial fiscal reforms have added to the fiscal burden.
Moody's also pointed to governance weaknesses, particularly the government's slow implementation of policies designed to mitigate external vulnerabilities. The agency emphasized the Maldives' limited capacity to control excess domestic liquidity, which has weakened the effectiveness of monetary policy and intensified pressures on foreign exchange reserves and the currency peg.
Focus of the Review
Moody's review will assess whether the Maldives can secure external financing, particularly from bilateral sources, to bolster foreign exchange reserves. Such financing would provide the country with more time to implement necessary fiscal and monetary reforms aimed at increasing foreign currency revenue and easing liquidity pressures.
Previous Credit Rating and Debt Challenges
In July 2023, Moody's maintained the Maldives' credit rating at CAA1. However, with growing debt burdens, the rating has now been downgraded. The Maldives faces a significant USD 600 million debt repayment in 2024, followed by an additional USD 1 billion in 2026.
Moody's has also lowered the country’s local and foreign currency ceilings, with local currency ratings dropping from B1 to B2, and foreign currency falling from B3 to CAA1. The three-notch gap between the local currency ceiling and sovereign rating reflects concerns over weak institutions, policy unpredictability, and large external deficits.
Risks of Currency Restrictions
Moody's highlighted the two-notch gap between foreign and local currency ceilings, underscoring the risk of potential currency convertibility restrictions during periods of external liquidity stress. These restrictions could be implemented to preserve reserve adequacy and maintain the exchange rate peg.
Current Reserve Situation and Government Response
As of now, the Maldives' official reserves stand at USD 444 million, with usable reserves at only USD 61 million—enough for just one month of imports. Although this is an 11% increase from previous months, the reserves remain critically low. The MMA is working on securing a USD 400 million currency swap agreement with the Reserve Bank of India (RBI) to bolster reserves.
Maldives' debt is expected to reach MVR 129 billion in 2024. Alongside Moody's, Fitch Ratings also recently downgraded the Maldives' credit rating to CC, down from CCC.
Government Actions
In response to the downgrades, the Maldives government has committed to implementing recommended actions from both Moody’s and Fitch. The government is also focused on cost-cutting measures within state-owned enterprises as it seeks to stabilize the country's financial situation and manage the growing debt load.
Despite these efforts, the Maldives faces an uphill battle, with looming debt repayments and ongoing concerns about its external liquidity position. The next steps will be crucial in determining whether the country can avoid further downgrades and potential default.
