Maldives: Risk Assessment
Country Risk Rating
Business Climate Rating
- Good relationship with both regional powers: China and India
- Expanding tourism potential in uninhabited islands
- Improving transport infrastructure
- Improving relations with the West, reliable support from multilateral institutions
- Extraordinary dependence on tourism
- Geographical isolation
- Precarious public finances
- Political volatility
- Extraordinary exposure to climate risk (rising sea level)
- Environmental issues (pollution)
Tourism dependence devastates activity, with a fragile rebound potential in 2021
The archipelago did not manage to escape the pandemic despite its geographical isolation. The Maldivian economy is extraordinarily dependent on tourism, which is a regular year account directly for 25% of GDP. As such, the economy will suffer heavily from the mobility restrictions imposed domestically and in Europe, India, and China, which account for the lion’s share of visitors. Since the first lockdown (H1 2020), there has been barely any recovery in visitor numbers, with arrivals in H2 2020 still only at around 15% of their 2019 levels. The outlook for growth in 2021 is contingent on the course of the pandemic. GDP data for 2020 indicate that the economy operated at around 50% capacity under strict lockdown conditions, mostly due to the services sector (78% of GDP), where retail (7%) and transport (13%) suffered from the spillovers of tourism. The economy’s rebound potential during the reopening has been further limited by the almost complete reliance on air transport. As long as global travel does not normalize, prospects for a recovery in 2021 remain fundamentally uncertain and skewed to the downside. Infrastructure investment is expected to be one of the few pillars of recovery, as projects aimed at developing new resorts and substantially expanding capacity at the Hanimaadhoo International Airport (new terminal and runway) remain on track. Fish products (57% of goods exports) will remain relatively resilient and imports subdued, meaning that net exports of goods will have a small but positive contribution.
Twin deficits set to soar amid collapsing tourism income
With tax revenues set to collapse by as much as 50% and expenditures expected to rise by around 15%, the country will post a record budget deficit in 2020. Of the extra 8% of GDP in net spending, health sector expenses accounted for 2%, while the rest concerned special measures to support the economy, including a special unemployment stipend, utility subsidies, and liquidity support for firms. Given the limited fiscal space allowed by the very high levels of public debt, cost-cutting measures were implemented, including civil servant wage compression. While insufficient to cushion the blow in 2020, this is an encouraging signal on the new administration’s regard for fiscal discipline. The current account is essentially driven by tourism receipts on the income side and imports of goods and services on the expenditure side. While fiscal spending softened the blow on import demand, income from tourism could have contracted by as much as 70-80%, deepening the structurally massive current account deficit. Typically financed through a combination of FDIs and foreign official funds/aid, multilateral action will be key to ensure funding and defending the currency peg. Given the precarious level of currency reserves (under 1 month of imports), the country qualified for the IMF’s rapid credit facility, incurring USD 29 million worth of SDR. Thanks to a USD 150 million swap line from the Reserve Bank of India, funding needs should be met. The external deficit should progressively normalize as tourism recovers faster than imports in 2021.
A reform-minded administration meets hurdles in its first year
Political tensions eased with the election of Ibrahim Mohamed Solih in September 2018. Under his predecessor, Abdulla Yameen, the country underwent an authoritarian shift, accompanied by a deterioration in security and of the business climate. The new government, which secured a 74% majority in the April 2019 parliamentary elections, has set its sights on improving the institutional framework, including steps to strengthen the rule of law and press freedom, major infrastructure projects, and industrial diversification. Progress on these fronts has prompted the country to re-join the Commonwealth of Nations, which it had abandoned in 2016 in order to avoid scrutiny on human rights issues. In 2020, some signs of tensions emerged within the ruling Maldivian Democratic Party. Despite President Solih’s success in asserting authority, such signs of infighting do not bode well for the government’s reform agenda. In fact, the country’s Doing Business ranking has continued to deteriorate, ranking 147th in 2020. Still, we expect a full mandate to be served until 2025. The Maldives is a prized geostrategic partner due to its position on international trade routes in the Indian Ocean. China has established its influence through a free trade agreement and significant infrastructure investments (over USD 1.2 billion) under the Maritime Silk Roads project. Moreover, loans from China make up 45% of the country’s national debt. However, the new administration seeks a diplomatic pivot towards India, manifested in a USD 400 million loan to finance various infrastructure projects.