Tuesday 05, December 2017 by Matthew Amlôt

Moody's: the Government of Maldives proposed tap issuance has no ratings impact

Moody's Investors Service says that the Government of Maldives' (B2 stable) announcement of a tap bond offering on its existing $200 million 7.0 per cent notes due 2022 will carry the B2 rating of the senior unsecured US dollar-denominated notes issued in June 2017, based on the preliminary prospectus.

The senior unsecured notes will rank pari passu with all of the Government of Maldives' current and future senior unsecured debt. The proceeds of the notes are intended to fund ongoing and/or new development projects of the government.

The Maldives' B2 issuer rating reflects Moody's assessment of low economic, government financial and institutional strengths, and moderate susceptibility to event risk. Over the past year, Maldives' economy has sustained robust growth, supported by the tourism and construction sector. However, this has been accompanied by twin budget and current account deficits and a ramp-up in debt. The Sovereign Bond Ratings methodology published December 2016, indicative rating range is Ba3-B2.

The Maldives' "Low (+)" economic strength is below the indicative score of "Moderate (-)", to take into account the absence of a World Economic Forum's Global Competitiveness ranking for the country. "Low (+)" economic strength reflects the Maldives' small size and a narrowly diversified economy, balanced by moderate per capita income. An archipelago of islands in the Indian Ocean, the Maldives has a nominal GDP of just $3.8 billion in 2016, one of the smallest B-rated sovereigns. By contrast, the Maldives' GDP per capita of $18,332 in purchasing power parity terms in 2016 has nearly tripled since 2000 and positions the country around the middle of the group of Moody's-rated sovereigns. Whilst a recent revision to national accounts statistics changes some of these metrics, the overall implications for Maldives' economic strength and credit profile are limited.

The economy is dependent primarily on tourism-related activities. While the sector has competed effectively in the past, it is subject to the vagaries of nature, as well as fluctuations in tourist arrivals. Reliance on tourism makes GDP growth volatile. For example, between 2006 and 2015, the standard deviation of GDP growth was in the top decile of all countries rated by Moody's.

GDP growth remains healthy relative to the median for B-rated sovereigns. Real GDP expanded by 3.9 per cent year on year in 2016, according to early November 2017 estimates, following a 2.8 per cent increase in 2015. A step-up in GDP growth over the medium term will rest primarily on the successful implementation of the government's planned infrastructure projects while containing political tensions. Along with foreign investment in the sector, this could pave the way for a continued expansion in tourism capacity.

Our assessment of "Low" institutional strength, reflects the challenges associated with developing institutional quality in a small island state that is geographically spread out and diverse. These constraints are reflected in the country's relatively low rankings on the Worldwide Governance Indicators. Scarcity of skilled labor also limits the sovereign's institutional capabilities. As a sign of limited policy effectiveness, inflation levels are volatile, as a result of a large imported content of domestic consumption albeit low on average.
The Maldives' "Low" fiscal strength is driven by a high and rising general government debt burden and a relatively large proportion of foreign-currency-denominated debt, balanced by strong debt affordability metrics. At 65.7 per cent of GDP in 2016, debt is significantly above the median for B-rated sovereigns and will likely rise further over the next two to three years, with the planned implementation of large public-sector infrastructure projects. Nonetheless, strong revenue collection, particularly from the tourism sector, supports debt affordability. The rebasing of the GDP data will affect some fiscal ratios without any material impact on our assessment of fiscal strength.

A sovereign issuer's 'susceptibility to event risk' reflects the probability of a credit-relevant event occurring, and the severity of its impact on the sovereign's credit profile. Our assessment of the Maldives' "Moderate (+)" susceptibility to event risks is driven by domestic political risk. An escalation of political tensions is a moderate probability scenario that is likely to have a relatively strong impact on policy continuity and the passage of reforms. Tensions could also durably weigh on tourism activity, investment and growth.
High fiscal deficits and a relatively short maturity of domestic debt implies that gross borrowing needs are sizeable. We assess government liquidity risk as "Moderate". In the absence of a market-implied rating for the Maldives, the scorecard does not fully capture the liquidity constraints that the government may face.

Our assessment of the Maldives' "Moderate (-)" external vulnerability risk, is set above an indicative score of "Low (+)", to take into account the economy's high import dependency and potential volatility in balance-of-payment receipts related to tourism and FDI.

While the country's current account deficits are wide, foreign reserves have been supported by foreign direct investment inflows. Moody's External Vulnerability Indicator -- which measures the adequacy of foreign reserves relative to maturing long- and short-term debt – will rise to 69.4 per cent in 2018.

Meanwhile, the banking system is fairly large, but it is also liquid and well-capitalized -- we therefore assess the Maldives' banking sector risk as "Very Low (+)".


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