Fitch Ratings has demoted the Maldives' Long-Term
Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) to 'B' from
'B+' and revised the Outlook to Negative from Stable.
Fitch expects the Maldives' economy to be hit hard by the
coronavirus pandemic due to the dominance of the tourism sector. Furthermore,
it is expected for the fiscal deficit to widen to 12% of GDP in 2020 from 5.7%
in 2019. A deep recession seems unavoidable, as tourism directly accounts for
about 25% of GDP, according to national accounts data, and even more
indirectly. The companys forecast of a 5% contraction in economic activity in
2020 and a rebound to 10% growth in 2021 are subject to significant
uncertainty.
Inflows of foreign currency and government revenue will fall
significantly as a result of the halt in tourism. The government may face
challenges in financing the deficit, as its otherwise strong ability and
propensity to tax the luxury tourism sector will be impaired. However, it is expected
for Maldives to continue to benefit from financial support from its
international partners. India supported the Maldives last year with USD1.4
billion in grants and concessional loans, while international financial
institutions provided assistance after the 2004 tsunami.
The Maldives' success as a prime luxury tourist destination
has generated relatively high GDP. Tourism demand should rebound once the
Covid-19 crisis has passed and tourists feel more confident to travel again.
Tourist arrivals showed an increasing trend in recent years, rising to 1.7
million in 2019 from 1.2 million in 2015. Capacity is still expanding, as many
new resorts are being built. The development of an additional runway and new
terminal at the main international airport, in particular, should allow for a
significant increase in the number of tourists in the coming years.
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