Moody's confirms Maldives' rating at Caa2, acknowledges reforms

Moody's Ratings on Tuesday maintains Maldives' credit rating at Caa2, which had been a downgrade earlier in September.

The global credit ratings agency in its latest Rating Action on Maldives outlook, confirmed the long-term foreign currency backed senior unsecured rating for Maldives Sukuk Issuance Limited at Caa2 with a negative outlook.

Moody's further noted that the "materialization of a sizeable currency swap arrangement with India" indicated continued access to bilateral financing.

It added that the introduction of new foreign currency regulations and tax reforms improves the prospects for an accumulation in foreign exchange reserves, with additional reserves in the Sovereign Development Fund (SDF) available to support external debt repayments.

The credit ratings agency added this negative outlook reflects "still heightened external liquidity risks." According to Moody's latest review, the foreign exchange reserves remain "very low in lieu of substantial external debt obligations over the next 12-18 months."

Moreover, 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 pressire - in time to comfortably address sizeable external liquidity needs - remain uncertain," Moody's said in its statement.

Moody's further noted that due to the lack of a comprehensive financing package, Maldives may continue to be "tested on securing bilateral and multilateral financing to shore up external buffers."

The agency also highlighted that Maldives had some success in obtaining external financing, include the currency swap agreement of USD 400 million and INR 30 billion with India. It said the withdrawal from the dollar facility supported a bump in foreign exchange reserves to USD 607 million in October, covering around 2.2 months of imports and recovering from a trough of USD 364 million one mother earlier.

In its rationale for the Maldives' negative outlook, Moody's said that despite the near-term respite from the swap with India, the downward risks persist in the absence of a comprehensive financing package.

Moody's noted that the twin deficits will likely remain wide over the next 1-2 years, which will "continue to drive sizeable external liquidity needs and, in the absence of sizeable inflows, erode already limited FX resources."

The medium-term expenditures laid out in the latest state budget, for 2025, remain elevated according to Moody's which noted that it would allow for modest narrowing of the fiscal deficit to around 7-8 percent of Maldives GDP over 2025-26, from an estimated 12-13 percent in 2024.

The agency also emphasized that the capital spending in the Public Sector Investment Program (PSIP) projects continue to grow, which indicates that capital imports will continue to remain high and in turn, drive current account deficits which is expected to remain wide at 13-15 percent of GDP over the next two years.

Moody's downgraded Maldives' credit ratings to Caa2 owing to the significant debt servicing outlook, with the government expected to repay USD 600 million in 2025 and USD 1 billion in 2026.

Besides Moody's, another global credit ratings agency, Fitch Ratings had downgraded the Maldives' credit rating earlier on August 29th to a 'CC' grade.

While the incumbent government, on multiple occasions, has given assurance of its debt servicing capabilities, it has been placing stringent austerity measures to reduce wastage of state expenditure.

The budget passed at the parliament last week had included MVR 11.5 billion of fiscal reform plans.