Despite the significant recovery in the country’s tourism industry, Moody’s downgraded the Maldives’ sovereign rating to Caa1 with a stable outlook from earlier B3, citing the drop in tax revenue collection and other factors. 

Tax revenues, the rating agency said, had fallen further than initially expected and debt had increased during the Coronavirus pandemic, adding deficits are likely to be high in the near term with more commercial borrowings.

In a statement, the agency said, “The rating also reflects Moody’s expectations that, even with a robust rebound in tourism arrivals in the coming quarters, the debt burden will only gradually decline on expectations that the government will maintain an expansionary, investment-driven fiscal policy that will repeatedly test the government’s access to a diverse set of funding sources.” 

Infrastructure projects funded by Chinese loans and market borrowings have significantly increased the archipelago’s debt burden and the disruption caused by the pandemic has only compounded the problem.

Despite the recovery in the tourism industry, the country’s debt burden--currently around 117 percent of GDP--is unlikely to come significantly in the coming years. Moody’s estimated by 2024, the debt will come down to only 107 percent of GDP. It projected the country’s economy to grow by 19 percent in 2021 and 14 percent in 2022. 

“The change in the outlook to stable indicates that risks to the Caa1 rating are balanced between these ongoing fiscal pressures with recent positive developments, namely the strengthening prospects of the tourism sector, which will support recoveries in growth and employment,” the agency said in the statement.

The rating agency further estimated the fiscal deficit is likely to remain near or above 10 percent of GDP through 2023, driven in large part by externally funded capital investment projects.

The archipelago was one of the worst-hit countries by the pandemic, as its economy shrank by almost 30 percent in 2030. In the same year, the government expenditure increased to almost 50 percent of its GDP, up from earlier 30 percent a year ago.