Moody’s Retains Maldives’ Credit Rating at Caa2, Highlights Economic Progress and Challenges

Moody's, a global credit rating agency, has reaffirmed the Maldives' Caa2 credit score, pointing to notable advancements in foreign exchange and fiscal reforms intended to stabilise the country's economy. The nation is moving closer to strengthening its financial condition despite obstacles.

Moody's

Important Economic Reforms That Increase Stability

The Maldives Monetary Authority's (MMA) efforts and the government's tax reforms, which are anticipated to improve the nation's foreign exchange reserves, were commended by Moody's in its most recent statement. Among the noteworthy acts are:

• New Foreign Exchange Regulations: are being introduced to boost dollar liquidity, which is essential for economic transactions, debt repayment, and imports.
• Tax Adjustments: It is anticipated that recent tax revisions will increase the government's foreign reserves and revenue.

Agreement on Currency Swap with India

The Maldives and India successfully negotiated a currency swap deal of USD 400 million and INR 30 billion, which is a significant highlight. It is anticipated that this deal, which will go into effect in September 2024, will greatly increase foreign exchange reserves.

Regulation of Foreign Exchange Enhances Liquidity

In October 2024, the Maldives Monetary Authority implemented a Foreign Currency Regulation mandating that lodging facilities deposit their foreign profits in local institutions. The purpose of this rule is to increase dollar availability domestically.

• High Compliance Rates: According to MMA, 173 out of 174 resorts have registered under the new framework, demonstrating strong compliance.
• Mandatory Currency Conversion:

1. Category A establishments must convert USD 500 per tourist arrival each month.
2. Category B establishments are required to exchange USD 25 per tourist.
3. Exceptions are granted on a case-by-case basis by the MMA.

Challenges Ahead: Foreign Debt Obligations

Moody's warns of impending difficulties even as it recognises the progress. The next 12 to 18 months will see the Maldives incur large international debt obligations. Since foreign exchange access is still an issue, the government must carry out the fiscal reforms mentioned in the 2025 Budget.

Future Outlook: Maintaining the Credit Rating

Moody’s emphasized that retaining or improving the current credit rating will depend on the successful execution of fiscal policies and the Maldives’ ability to secure additional foreign currency financing. Strengthening foreign reserves and adhering to the new regulatory framework will be critical for long-term economic stability.

The Maldives has made notable progress in stabilizing its economy through strategic reforms and international collaborations. However, the road ahead remains challenging, with foreign debt and currency access posing significant hurdles. Continued fiscal discipline and robust implementation of reforms will be key to ensuring sustained economic growth and stability in the coming years.