Global credit rating agency Moody’s has upheld the Maldives’ credit rating at Caa2, highlighting the government's ongoing financial reforms to stabilize the economy. This decision underscores the nation's efforts to navigate economic challenges, despite the pressures of external debt and limited foreign reserves.
In September 2023, Moody’s downgraded the Maldives’ credit rating from Caa1 to Caa2, citing increasing risks of default, insufficient foreign exchange reserves, and a sluggish economic recovery. However, the decision to maintain the Caa2 rating reflects progress in key areas, including improved access to bilateral financing, new foreign exchange policies, and reforms aimed at increasing government revenue.
Positive Developments Supporting the Rating
1. Strengthened Bilateral Financing
The Maldives has secured significant external support through bilateral agreements:
- A USD 400 million currency swap agreement with India, bolstered by an additional INR 30 billion, has been instrumental in stabilizing the nation’s financial standing.
- These agreements showcase the Maldives’ ability to gain external financial backing during critical times.
2. New Foreign Currency Regulations
The Maldives Monetary Authority (MMA) introduced new foreign currency regulations designed to:
- Increase foreign exchange reserves.
- Create a more structured approach to managing foreign currency, supporting external debt repayment efforts.
3. Revenue and Reserve Accumulation
The government has implemented tax reforms and strengthened the Sovereign Development Fund (SDF) to:
- Enhance reserve accumulation.
- Improve the Maldives’ capacity to meet its external debt obligations without default.
Challenges Facing the Economy
While these reforms signal progress, Moody’s report highlights persistent challenges that could hinder long-term stability:
External Debt Obligations
The Maldives faces steep external debt repayments:
- USD 600–700 million is due in 2025.
- A USD 500 million sukuk bond is set to mature in April 2026, contributing to a total of USD 1 billion in debt servicing for that year.
Foreign Currency Pressures
Despite regulatory changes, securing adequate foreign currency remains a struggle, complicating efforts to meet external debt requirements.
Rising National Debt
The Ministry of Finance projects:
- Total debt will reach MVR 139 billion by the end of 2024.
- Debt will rise to MVR 150 billion in 2025, equivalent to 124% of GDP.
Government’s Strategy to Tackle Economic Pressures
To address these financial challenges, the government has introduced key measures:
Revenue-Boosting Strategies
- Seven new initiatives are expected to generate an additional MVR 4.5 billion annually.
- These reforms aim to diversify income streams and reduce reliance on external borrowing.
Reducing Public Spending
- Measures to curb unnecessary public expenditures have been prioritized, focusing on efficient allocation of resources.
