Ahmed Mohamed & Ibrahim Athif Shakoor
On the 29th of August 24, Fitch Ratings downgraded our Long-Term Foreign-Currency Issuer Default Rating to 'CC' from 'CCC+', its 2nd downgrade in 3 months. Less than 2 weeks later, on 11th September, Moody’s downgraded our long-term local and foreign currency issuer ratings and the Maldives Sukuk Issuance to Caa2 from Caa1 and placed the rating under review.
Now | Before | Area of downgrade | |
Moody's | Caa2 | Caa1 |
|
Fitch | CC | CCC+ | Foreign Currency Issued Bonds |
The ambit of this essay is to tease out the reasons for the downgrades as offered by the agencies. This essay shall also submit a considered view on the conditions necessary for revival of the confidence of the rating agencies.
It is important to note that unless and until our outlook is revised upwards, perhaps not sunny but at least to ‘settled’, sovereign bond buyers will remain nervous, large-scale investors will remain skittish and multi-lateral agencies will await signs of discipline on our governance. Geopolitically tethered bilateral assistance would be the only likely lifeline until then.
The why and the wherefores
The reports accompanying the downgrades highlight the economic vulnerability of our country, and the key issues are cited below.
1. Fitch Downgrade: Indicating a High Risk of Default
Fitch after having reduced our sovereign ratings June 24, further reduced the credit rating from CCC+ to CC in August 24, emphasizing the country's increased risk of default. Fitch has expressed worries about our foreign debt obligations, pointing out that the $50 million due in the fourth quarter of 24 and the $557 million due in 25 may be unmanageable without significant external funding or rapid fiscal adjustment.
2. Moody’s Double Downgrade: A Clear Warning Signal Emerges
After having reviewed the context in June 24, amidst growing concerns, Moody's in September downgraded the credit rating from Caa1 to Caa2. Moody’s downgrade is also more concerning because they had specifically referred to foreign and local bonds as well as the Sukuks in their focus of downgrade.
Moody's underlined that the country's sluggish implementation of important fiscal reforms hinders our ability to build foreign exchange reserves.
3. Key economic drivers behind the twin downgrades
Moody’s and Fitch pinpointed various fundamental economic challenges that are influencing the credit downgrades, summarised here below.
a. Dwindling foreign exchange reserves:
As of August 24, foreign exchange reserves had plummeted, falling well short of the sums required to satisfy upcoming debt commitments, increasing vulnerability to external shocks .
b. Mounting external debt:
They highlighted the fact that we face considerable external debt obligations, with over $1 billion due by 26, including a $500 million sukuk bond. The agencies also questioned the government's capacity to refinance or meet these financial commitments.
c. Dual deficits:
In 23, we had major financial issues, with a budget deficit of -12.8% of GDP and a current account deficit of -21.4%. Our foreign reserves had come under extra strain because of huge deficits, which are mostly attributable to a heavy reliance on imported food, energy and capital goods.
d. Limited monetary policy effectiveness:
An excess of domestic liquidity has undermined the Rufiyaa's peg to the US dollar. The efforts of the Maldives Monetary Authority to keep the currency pegged have resulted in a continuous decrease in the nation's foreign reserves.
e. Governance and ESG Concerns.
Moody’s and Fitch have pointed out that weak governance and corruption are major challenges hindering us from effectively carrying out essential reforms. Moody’s pointed out the delayed implementation of crucial fiscal adjustments. Fitch additionally highlighted that we have a Governance ESG Relevance Score of 5, highlighting concerns associated with political stability, institutional effectiveness, and corruption. Both agencies highlighted significant environmental risks, as increasing sea levels and extreme weather patterns present major challenges to the Maldives' economy, which relies heavily on tourism.
f. An Uncertain Future.
Moody's and Fitch both issued warnings about a possible default unless quick reforms are implemented, leaving the country's financial future uncertain. The country's economic outlook is still dire in the absence of significant external financing or debt restructuring.
4. Way forward
While both Fitch and Moody’s accompanied their ratings downgrade by explanations somewhat technical in nature, it is perhaps important to get a layman’s perspective on both to chart the course forward.
These 2 quotes, 1 from Moody’s and 1 from Fitch are perhaps representative of the major concerns they raise.
The assessment also reflects governance weaknesses in the ability of the country’s institutions to swiftly adopt measures that decisively mitigate external vulnerability risks. Limited capacity to reduce excess domestic liquidity also speaks to weaker monetary policy effectiveness, which has led to sustained pressures on the peg and foreign exchange reserves. The decision to place the ratings under review is driven by our view that Maldives' fragile external liquidity position will likely worsen further without near term financing. The rating review will focus on assessing whether the sovereign is able to secure external financing – mainly from bilateral sources – to shore up foreign exchange reserves. In turn, this would buy time for the implementation of announced fiscal and monetary measures to raise foreign currency revenue and reduce external liquidity pressures, thereby avoiding default for the foreseeable future.
11th September, Moody’s
Fitch, in very similar language said
FX swap arrangements could be made with strategic bilateral partners to ease the external financing pressure, although it is uncertain whether these will materialise. Fiscal consolidation measures, if fully implemented, could also help alleviate the pressures over the medium term. However, we believe large and rising public debt with a lack of meaningful fiscal consolidation will increasingly become a constraint to receiving financial assistance. Support from IMF or other multilateral donors would most likely be contingent on debt restructuring.
29th August, Fitch Ratings
If a single sentence could encapsulate the essence of the reasons offered by both Fitch and Moody’s for the downgrade, we posit that it could be the following.
The government has not demonstrated its ability or willingness to take the daunting steps necessary for remedial adjustment, and even while ‘friendly countries’ might assist the Maldives, to navigate short term hurdles, unless the fundamental issues that led to the crisis are rectified, it will only postpone the inevitable.
If so, then the magic elixir required, is to demonstrate the willingness and the ability of the state to implement the tough and no doubt politically ‘hurtful’ decisions to correct the many aspects that had led us here.
Therefore, what the rating agencies, and through the agencies, investors and bond buyers are looking for, are not signs or omens, but action by the government. Clear statements from the state, instead of vague and opaque asides from a variety of state dignitaries. More importantly, they have raised skepticism because of past commitments not matched with action and are looking forward to witness comprehensive action by the government.
It is our view here that only deliberate, decisive and determined fiscal discipline will sway the international observers. Until such time, lifelines by big brother countries are best viewed as assistance from those who will ‘smile and smile and be a villain’. (Hamlet, Shakespeare)
Of greater concern is that such assistance by big brothers will only delay the inevitable, with even further debt and increasing interest rates indebting the nation and its future.
For until, such time, that we discipline ourselves to live within our means, the future will not change. And the more it is delayed, the more hurtful the inevitable pain will be.
Maldives Economy Today | Issue 1 Vol. 1 | Austerity & Recovery
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