Maldives

MAJOR MACRO ECONOMIC INDICATORS

(e): Estimate (f): Forecast

RISK ASSESSMENT

Dynamic growth, still driven by tourism

Growth has stabilized since 2023 after the volatility experienced between 2020 and 2022 that produced one of the severest recessions in the world which was followed by an equally dazzling recovery that was driven by the upturn in global tourism and favourable government policies. The economy is extraordinarily dependent on tourism, which in a normal year directly accounts for 25% of GDP, or 60% including related sectors such as food suppliers. The service sector in the broad sense accounts for 78% of GDP. As a result, growth will continue to be largely driven by tourism, which will continue to benefit from the upturn in Chinese tourism, with the Maldives being one of the top tourist destinations for China prior to the pandemic and having been one of the first travel destinations authorised by the Chinese government at the end of 2022. This, coupled with arrivals from India and Russia, will counterbalance the reduced robustness of tourism from the countries of the European Union and the United States due to their weaker purchasing power, as well as growing competition from certain increasingly attractive destinations, such as Thailand. This will have a positive impact on tourism-related sectors such as transport and retail. Business will also be boosted by major public investment, particularly in infrastructure to support tourism. The territory's largest project, the Greater Malé Connectivity Project (which seeks to link the capital Malé to the islands of Villingli, Gulhifalhu and Thilafushi by road) is due to be completed by the end of 2024, while the Velana International Airport expansion project will continue. Inflation is expected to moderate in 2024 following two years of high inflation, which is traditionally very low, due to cheaper food and energy imports, as well as a likely gradual reduction in public spending in favour of households once the presidential election in September 2023 and the parliamentary elections in March 2024 are over. This budgetary squeeze will weigh slightly on private consumption.

Large twin deficits and a worrying debt situation

The budget deficit, although still substantial, should narrow slightly in 2024. The public accounts will benefit from substantial revenues from tourism, thanks to its robustness, coupled with increased taxes on tourist goods and services effective since the beginning of 2023. In addition, public subsidies are expected to be rationalised once the election period is over. However, major infrastructure projects will continue to generate substantial public spending, which, combined with a growing interest burden and continued strong support for state-owned enterprises, will continue to fuel a large public deficit. The current account, which is structurally in deficit, is fuelled by tourism receipts on the income side and imports of goods and services on the expenditure side, and will continue to record a large deficit. The moderation in world commodity prices will do little to alleviate the import burden, given the massive equipment requirements for infrastructure projects and the import of a large proportion of products for tourists.
Public and current account imbalances pose a real financial risk as they generate debt. The significant need for external financing weakens the currency peg and makes the country dependent on concessional financing. Foreign exchange reserves are very low and are eroded by the high price of imports and the defence of the rufiyaa's peg to the dollar in the face of downward pressure. In addition, domestic debt (55% of the total), due to its composition in short-term treasury bills, presents a risk of inflation and refinancing. The sustainability of public debt, 55% of which is denominated in foreign currencies, is questionable given this context. However, in the short term, the government can count on the understanding of China, India and the multilateral banks, which, alongside the bondholders, represent the Maldives’ main creditors.

Despite signs of division, the government's position is solid

Political instability eased with the election of Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP) as president in September 2018. Under his predecessor, Abdulla Yameen, the country underwent an authoritarian turn, accompanied by a deterioration in security and the business environment. The government, which has had a large majority since the 2019 parliamentary elections, has set itself the goal of improving the institutional framework, including measures to strengthen the rule of law and press freedom, major infrastructure projects and industrial diversification. Solih, who won the MDP primary elections, is expected to win the presidential elections in September 2023. The main candidate of the Progressive Party of the Maldives (PPM, the main opposition party) and former president Abdulla Yameen is, pending an appeal judgement unlikely to be handed down before the elections, found guilty of corruption and money laundering, sentenced to 11 years in prison and banned from running.
However, disagreements have arisen within the MDP over government corruption and the results of the party primary. In geostrategic terms, the Maldives remains a valued partner due to its position on international trade routes in the Indian Ocean. China is exerting its influence there through a free trade agreement and major infrastructure investments (over USD 1.2 billion) as part of the Maritime Silk Roads project. In addition, China's loans (commercial and public) account for 45% of the country's national debt. However, the new administration is seeking to make a diplomatic pivot towards India, as demonstrated by a USD 400 million loan to finance various infrastructure projects and closer defence cooperation between the two countries, as demonstrated by the visit of the Indian Defence Minister in May 2023. Finally, the signing of a military agreement with the United States in 2020 represents a rapprochement with the West.

Last updated: September 2023