Rating agency Moody’s downgraded Maldives credit rating to B3 from B2 on Friday, citing a collapse in the island nation’s tourism receipts due to the global coronavirus pandemic.

Moody’s said it downgraded the Maldives credit rating — used by investors to assess the risk associated with a debt issuer — because the ongoing shock to the tourism sector will significantly impair economic activity and raise government liquidity risks, exacerbating weak fiscal and external positions.

“For Maldives, the shock transmits mainly through a collapse in the country’s tourism receipts, which are a vital source of government revenue and foreign exchange earnings,” a statement read.

“With existing fiscal weaknesses and a fragile external position with low reserves coverage of external debt and import payments, the shock will exacerbate government liquidity risks. Heightened liquidity risks will in turn intensify external pressures.”

Moody’s said it maintained the negative outlook because a potentially sharper and longer contraction in economic activity will exert greater pressure on government and external finances than anticipated.

“The negative outlook also relates to limited fiscal space and financing options in the context of a rising debt burden and sizeable financing requirements that may contribute to higher government liquidity pressures in the coming years, and especially ahead of a large bond maturity in 2022, even amid an eventual normalisation in economic activity,” the statement read.

The New York-based global credit rating agency also lowered Maldives long-term local-currency bond and deposit ceilings to Ba3 from Ba1, and the foreign currency bond ceiling to B1 from Ba3. The foreign currency deposit ceiling was also lowered to Caa1 from B3.

Moody’s downgrade follows a similar move by Fitch, the only other agency that rates Maldives, in March.

Fitch cut the Maldives credit rating to B from B+ and revised the outlook to negative from stable, citing the unprecedented shocks to the tourism industry.

The coronavirus outbreak has hit the Maldivian economy hard, as travel restrictions and other preventive measures affect the country’s lucrative tourism industry, which contributes the bulk of the island nation’s state revenue and foreign reserves.

Before the pandemic, the government had been bullish about tourism prospects, targeting two million, high-spending holidaymakers this year after last year’s record 1.7 million.

However, tourist arrivals saw a year-over-year decline of 22.8 per cent in the first 10 days of March. Officials say the number of tourist arrivals to the Maldives could drop by half in 2020.

All international airlines have suspended scheduled operations to the Maldives, as the island nation enforced a blanket suspension of on-arrival visa in late March in a bid to combat the spread of the novel coronavirus.

Even before the visa suspension, the Maldives had closed its borders to arrivals from some of the worst-hit countries, including mainland China, Italy, Bangladesh, Iran, Spain, the United Kingdom, Malaysia and Sri Lanka. Visitors from three regions of Germany (Bavaria, North Rhine-Westphalia and Baden-Württemberg), two regions of France (Île-de-France and Grand Est) and two regions of South Korea were also banned from entering the country.

All direct flights to and from China, Italy, South Korea and Iran were also cancelled.

Cruise ships and foreign yachts were also banned from docking at any of the country’s ports.

With arrival numbers falling and the visa suspension in effect, several resorts across the Maldives had been closed.

Tourism has been the bedrock of the Maldives’ economic success. The $5 billion-dollar economy grew by 6.7 per cent in 2018 with tourism generating 60 per cent of foreign income.

However, the government is at present projecting a possible 13 per cent economic contraction this year — an estimated $778 million hit.

The government had announced plans to shave MVR 5 billion ($324 million) off state expenditure and reduce the total state expenditure for the year to MVR 30 billion ($1.944 billion) from the approved MVR 38.7 billion ($2.5 billion).

Austerity measures include a 20 per cent cut on salaries and allowances of all political appointees, 25-35 per cent cuts on salaries and allowances of public sector employees, and 30-70 per cent cuts across travel, training, renovations and capital equipment budgets.

The Maldives is also looking to borrow $233.37 million from international lenders to plug the gap in balance of payments stemming from the coronavirus pandemic.

Funds already pledged by international lenders include $28.9 million from the International Monetary Fund (IMF), $20 million from the OPEC Fund for International Development, $17.3 million from the World Bank, and $3.28 million from the European Union.

In the meantime, the government will borrow MVR 4.2 billion ($272 million) under an overdraft facility at the central bank to cover state expenses and maintain public services amidst the coronavirus pandemic.

On March 8, Maldives reported its first cases of the novel coronavirus, as two hotel employees tested positive for Covid-19 at a luxury resort in the archipelago.

Eighteen more cases — all foreigners working or staying resorts and liveaboard vessels except five Maldivians who had returned from abroad — were later identified.

A six-case cluster of locals, detected in capital Male on April 15, confirmed community transmission of the coronavirus. Several more clusters have since been identified, bringing the total number of confirmed case in the Maldives to 1,274.

Four deaths have been reported and 109 have made full recoveries. Five remain in intensive care.

The Maldives announced a state of public health emergency on March 12, the first such declaration under a recent public health protection law.

The public health emergency declaration has allowed the government to introduce a series of unprecedented restrictive and social distancing measures, including stay-at-home orders in capital Male and its suburbs, a ban on inter-island transport and public gatherings across the country, and a nationwide closing of government offices, schools, colleges and universities.

Non-essential services and public places in the capital such as gyms, cinemas and parks have also been shut.

Restaurants and cafes in the capital have been asked to stop dine-in service and switch to takeaway and delivery.

A nationwide shutdown of all guesthouses, city hotels and spa facilities located on inhabited islands is also in effect.

Photo: Maldives Monetary Authority (MMA), the central bank of Maldives. PHOTO/ CORPORATE MALDIVES