Moody's: Maldives' B2 rating supported by robust growth path and strong debt affordability, but economy is narrowly diversified

Moody's Investors Service says that the Government of Maldives' B2 issuer rating and stable outlook are supported by the country's robust growth path and strong debt affordability metrics. However, a narrowly-diversified economy, high debt burden and domestic political risks represent credit constraints.

Moody's conclusions were contained in its recently-released credit analysis titled "Government of Maldives -- B2 stable: Annual Credit Analysis" and which examines the sovereign in four categories: economic strength, which is assessed as "low (+)"; institutional strength "low"; fiscal strength "low (+)"; and susceptibility to event risk "moderate (+)".

The report constitutes an annual update to investors and is not a rating action.

Moody's report points out that the expansion of Maldives' tourism sector has helped drive robust growth rates, averaging just over 5.0% between 2010 and 2015. But, dependence on a single sector also exposes the economy to considerable volatility.

The country's debt burden is significantly higher when compared with similarly rated sovereigns, with debt amounting to 63.6% of GDP in 2015. The debt burden will likely rise further, as the country embarks on several large public sector infrastructure projects that are designed to enhance the competitiveness and capabilities of the tourism sector.

The anticipated rise in debt, and the sizeable proportion of foreign currency-denominated borrowing that exposes debt servicing costs to exchange rate movements, act as fiscal constraints.

Nevertheless, debt affordability is supported by a large revenue base and funding is secured at low rates. Moreover, government liquidity risks are limited, due to a large domestic market that provides a sizable funding base.

Meanwhile, the struggle for power between political parties could adversely affect the nature and effectiveness of policies and weigh durably on tourism, investment and GDP growth.

Moody's would consider the following as credit positive for the country's sovereign rating: (1) a steady reduction in fiscal deficits and the government debt burden; (2) a successful diversification of the economy's productive base; and (3) a sustained period of political stability which encourages policy continuity and drives reform.

By contrast, the following factors would be credit negative: (1) a meaningful deterioration in fiscal and debt metrics and worsening debt affordability; (2) an escalation in domestic political tensions which hinders effective policy making or undermines growth; and (3) a shock to the tourism sector which results in a sharp fall in growth.