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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