Owing to tourism, Fitch assigns Maldives B+ rating with stable outlook

Fitch Ratings has assigned the Maldives a first time Long Term Foreign and Local Currency Issuer Default Ratings (IDRs) at B+ with a stable outlook, largely owing to the country’s resilient tourism industry.

In an statement, the leading global credit rating agency said Monday that the country ceiling for the Maldives is assigned at BB- and the Short Term Foreign and Local Currency IDRs at B.

Fitch said the ratings balance the Maldives’ advanced economic development, strong GDP growth and high government revenue generated by a prosperous tourism sector against a high government debt burden and low foreign reserve buffers.

The Maldives’ success as a prime luxury tourist destination has generated relatively high GDP per capita of USD 9,145 (B category median is USD 3,362), Fitch said, adding that real GDP growth is expected to pick up to four percent in 2017 and 4.5 percent in 2018 from 3.9 percent in 2016 due to continued tourism demand and construction. It noted the development of new resorts and the large infrastructure projects initiated by the government, including capacity expansion of the main airport, the construction of a bridge linking the capital to population centres, an advanced medical centre and new housing units.

“The government’s ability and propensity to tax the luxury tourism sector has led to a revenue ratio of 34.9 percent of GDP, significantly higher than the B median of 24.7 percent. There is still potential to further increase the amount of revenue raised from tourism if needed, given the likelihood of rather inelastic demand in the luxury segment to moderate price rises. Government revenue forms an important link between tourism and other sectors of the economy,” the statement read.

However, Fitch warned that high dependence on tourism makes the economy vulnerable to sudden events that harm the perception of Maldives as a safe and reliable tourist destination, including the emergence of political instability in an already-polarised environment or security issues.

“The country’s high dependence on a single sector causes volatility in economic metrics, such as GDP growth, and makes the country vulnerable to external shocks and domestic developments that undermine the Maldives’ attractiveness as a tourist destination; for example, changes in perceptions of safety,” the statement read.

The agency also cautioned that execution of many large infrastructure projects at the same time has posed serious fiscal challenges. Foreign debt financing of the large construction projects will increase the importance of foreign-reserve buffers in the years ahead, it said.

“The risks to external balances from the low reserve base are mitigated by the persistent current account deficits being fully financed by foreign direct investment and by the tourism sector both earning and spending in US dollars. This implies that tourism-related outflows should also fall in the case of a sudden drop in tourism-related inflows,” the statement read.

“In addition, the country has managed with similarly low levels of foreign-exchange reserves for a number of years without experiencing an exchange rate shock.”

Dredging of the satellite town of Hulhumale, a major project undertaken by the government. PHOTO/ HDC

Fitch highlighted the new measures included in this year’s state budget to increase revenue and to cut expenditure to make fiscal space for the projects underway, saying that the remedial action should significantly lower the deficit to 4.3 percent of GDP in 2017 and 3.8 percent in 2018. However, it said the official target of reducing the fiscal deficit from the government’s estimate of 7.4 percent of GDP in 2016 to 0.5 percent in 2017 is highly ambitious.

“On the basis of the government’s announced measures and Fitch’s nominal GDP forecast, the agency expects general government debt/GDP to fall gradually from 72.3 percent in 2017 to 70 percent in 2020. At the same time, risks to debt sustainability remain and the stabilisation of debt, assumed by Fitch, depends on the government’s willingness and ability to follow through on its fiscal consolidation plan,” the statement read.

Fitch highlighted a few main factors that could lead to negative rating action:

  • A significant rise in general government debt; for instance, caused by a failure of the government’s fiscal consolidation strategy.
  • Balance of payment pressures; for instance, a fall in foreign exchange reserves or a higher than Fitch expected increase in external debt.

Fitch also highlighted a few main factors that could lead to positive rating action:

  • Policy initiatives that lower general government debt to levels closer to the rating category median.
  • Strengthening of external buffers through accumulation of foreign-exchange reserves.
  • Diversification of the economy by developing sectors other than tourism; for example, facilitated by implementing structural reforms that enhance the business environment.

Fitch’s first ever credit rating for the Maldives is in line with a similar rating assigned by Moody’s Investors Service in September of B2 with a stable outlook. In the first ever sovereign credit rating of the Maldives, Moody’s also noted the Maldives’ healthy GDP growth prospects driven by the tourism sector, while raising concerns over relatively low institutional and fiscal strength and moderate susceptibility to event risk.

Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested.

Majority of foreign investments come into the tourism sector. Several foreign investors are developing resorts in the Maldives with many more expected to come this year as well.

With several foreign investments in tourism, Maldives has maintained its lead in performance of tourist properties amongst Indian Ocean destinations. A recent report by industry-leading global real estate services company Colliers International has shown that the Maldives has a significant lead on rival Indian Ocean destinations such as Mauritius, Seychelles and Zanzibar in almost every performance indicator, including occupancy, Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR).

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