Maldives uses borrowings only for capital expenditure: Central Bank Chief

By P.K. Balachandran

Maldives Monetary Authority Governor Ahmed Naseer has said that since the expected total revenue (excluding grants) of the Government is 1.3 times higher than the expected current expenditure, the revenue is sufficient to cover current expenditure, and funds raised from borrowings are used solely for capital investments.

On 22 November, a National Budget of MVR27.9 billion ($ 1. 8 billion) was approved for 2018, with a primary deficit of MVR1.1 billion ($ 64 million). Of the total budget, current expenditure accounted for 55%, while 45% was allocated for capital expenditure

The Maldives, a small geographically dispersed archipelago island nation with limited natural resources, is mainly reliant on tourism and fishing. Since its inception, the tourism sector has been a continuous success and dominated the Maldivian economy, accounting for at least a quarter of the country’s GDP. 

In recent years, with the commencement of large public infrastructure projects, residential housing and establishment of new tourist ventures, the construction sector has also strengthened rapidly.

Economic transformation through infrastructure investment is currently one of the main priorities of the Government’s fiscal policy. Accordingly, Government policies are aimed at streamlining the current expenditure and reallocating Government spending, while expanding the scope of capital investment. 

Currently, real GDP growth of the Maldives is expected to reach 6.9% in 2017.

Need for external borrowing

“However, a main challenge faced by the Maldives is the lack of a well-developed financial system. With only a few commercial banks dominating the sector, raising finance domestically for large infrastructure projects is a challenge. In addition, the graduation of the Maldives from Least Developed Country to Middle Income Country status has limited the availability of foreign aid. This results in resorting to external sources to finance these projects,” Naseer pointed out in a statement.

In order to facilitate external financing, a credit rating for Maldives was carried out by Moody’s and Fitch, where a rating of B2 and a B+ were assigned respectively.

The Maldivian economy, with the current administration taking office, embarked on an infrastructure scale up program in 2015 with the aim of addressing infrastructure bottlenecks and to diversify the economy. 

The ongoing mega projects include the China-Maldives Friendship Bridge, 25-storey Dharumavantha Hospital, expansion of Velana International Airport and the development of Hulhumale’ phase II. Out of these projects, China-Maldives Friendship Bridge and Dharumavantha Hospital are expected to be completed within 2018. 

“These projects will serve as future savings and will also increase the growth potential of the economy. For instance, there is currently a large foreign currency outflow abroad by Maldivians for medical services requiring specialised services not available in the country. With the opening of the new hospital it will help retain more foreign currency within the economy,” Naseer said.

The completion of these projects will provide further new investment opportunities and increase the scope of revenue generating activities in the economy over the medium to long term, he added.

“In addition to ensuring that the proper technical approach has been taken in order to safeguard economic growth; the Government has also set up a sovereign development fund and set aside all the proceeds from the airport development charge, in order to address future repayments – this speaks to a very reasoned, responsible and structured fiscal, and development, policy,” Naseer said.

Tap bond offering will also carry B2 rating 

Meanwhile the rating agency Moody’s has said that the Maldives’ (B2 stable) announcement of a tap bond offering on its existing $ 200million 7% notes due in 2022 will carry the B2 rating of the senior unsecured US dollar-denominated notes issued in June 2017, based on the preliminary prospectus.

A tap bond issue is a procedure that allows borrowers to sell bonds or other short-term debt instruments from past issues. The bonds are issued at their original face value, maturity and coupon rate, but sold at the current market price.

The senior unsecured notes will rank paripassu (side by side) 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.

Robust growth 

The ratings agency notes that over the past year, Maldives’ economy has sustained robust growth, supported by the tourism and construction sector.

Moody’s however adds that this has been accompanied by twin budget and current account deficits and a ramp-up in debt.

The Maldives has a nominal GDP of just $ 3.8 b (2016 figures), one of the smallest B-rated sovereigns.

But 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. 

While a recent revision to national accounts statistics changes some of these metrics, the overall implications for Maldives’ economic strength and credit profile are limited explains Moody’s. 

“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,” says the ratings agency.

Even so, GDP growth remains healthy relative to the median for B-rated sovereigns says Moody’s. 

Real GDP expanded by 3.9% year on year in 2016, according to early November 2017 estimates, following a 2.8% 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.

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% in 2018, says the ratings agency.

The Maldivian banking system is fairly large, but it is also liquid and well-capitalised – we therefore assess the Maldives’ banking sector risk as “Very Low (+)”, Moody’s says.