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Maldives

Maldives

Population 0.4 million
GDP 14,571 $US
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 6.9 7.5 6.5 6.0
Inflation (yearly average, %) 2.3 1.4 1.5 2.3
Budget balance (% GDP) -3.0 -4.6 -5.0 -5.6
Current account balance (% GDP) -21.9 -25.3 -20.4 -15.7
Public debt (% GDP) 61.6 68.0 70.1 71.4

(e): Estimate. (f): Forecast.

STRENGTHS

  • Increasing bilateral relations with Saudi Arabia and China, ties to India restored
  • Growth of tourism activity on uninhabited islands
  • Airport infrastructure
  • Support from the World Bank and the Asian Development Bank

WEAKNESSES

  • Dependent on international economic conditions due to the importance of tourism in the national economy
  • Island location
  • Chronic budget deficit and rising public debt
  • Political instability
  • Vulnerable to natural disasters; highly exposed to the negative effects of climate change; 80% of land is one metre or less above sea level
  • Excessive pollution; waste management challenges

RISK ASSESSMENT

Stable growth but dependent on tourism and infrastructure projects

Growth is expected to remain high in 2020, despite a slight slowdown. Tourism will once again be the economic driving force (24% of GDP). The sector continued to expand in the first half of 2019, with 18.7% more tourist arrivals than in the first half of 2018. While Europe remains the leading region of origin for tourists, the 2019 growth was due to a rebound in Asian partners (20.4% increase in arrivals), which represent 37.9% of travellers. The number of Indian tourists in particular has doubled. This relative diversification bodes well, and the main threat to Maldivian growth today would be a sharp decline in global growth, via its impact on tourist budgets. The addition of an airstrip and a new passenger terminal at Malé airport will increase inflows of tourists on the island from 1.4 million in 2018 to 2 million in 2020. However, despite its importance, the project has seen delays, which could create a bottleneck in the tourism sector. Construction slowed in 2019, as many projects were completed, but it will remain one of the mainstays of economic activity in 2020. Although the fishing sector needs to be modernized, it still accounts for 20% of employment and 10% of GDP. Inflation is expected to remain low in 2020, thanks to the moderation of world energy prices and the continuation of the food subsidy policies adopted in 2018.

 

The challenge of making fiscal adjustments that are consistent with growth

The authorities must strike a balance between ensuring that public debt is sustainable while maintaining growth, which is a heavy consumer of public investment. The public deficit widened in 2019, in line with increased social spending and the development of the tourism sector, which still requires major infrastructure investments. These investments will have to be curbed and should fall from 4.8% of GDP in 2018 to an average of 3.6% over the 2019/2021 period, according to budget forecasts. Government revenues will continue to be driven by high growth rates, which will not be sufficient to offset the increase in current expenditure, so the public deficit will widen further in 2020. Maldivian public projects are heavily dependent on external financing (50% of sovereign debt), and there are few lenders. China holds about one-third of the external debt. Refinancing needs are high, with half of the debt being short-term. However, the support of government donors – notably India, with which the new government has improved its relations – and the establishment of a sovereign fund dedicated to the amortisation of bonds maturing in 2022 and 2023 should ensure sovereign solvency.

The current account deficit is massive but began to narrow in 2019, thanks to strong tourism revenues and a reduced deficit in trade of goods due to lower construction imports, as a number of projects were completed or postponed. As these two trends are expected to continue, the current account will continue rebalancing in 2020. The deficit is financed by external debt for public projects, while the private sector depends on FDI. Foreign exchange reserves are low, covering only one month of imports. Nevertheless, as tourism companies use the dollar for both their spending and income, a negative shock to this sector would have a limited impact on reserves. The banking system remains underdeveloped, with private credit amounting to just 31% of GDP. However, it is well capitalized, and the quality of its assets has been constantly improving since 2012.

 

A fresh start for Maldivian political life

Political tensions eased with the election of the opposition candidate and architect of the Maldivian multi-party system Ibrahim Mohamed Solih in September 2018. Under his predecessor, Abdulla Yameen, the country underwent an authoritarian shift, accompanied by a deterioration in security and of the business climate. The new government, which won a 74% majority in the April 2019 parliamentary elections, has set its sights on improving the institutional framework, including steps to strengthen the rule of law and press freedom. On the economic front, major infrastructure projects will remain essential, but President Solih has also announced measures to promote diversification and competitiveness, which will involve support for SMEs and the agricultural sector. However, the Maldives has moved down to 147th in the World Bank’s Doing Business 2020 ranking, its fifth consecutive downgrade, due to the lack of economic reforms in the current government’s first year in power.

The Maldives is a prized geostrategic partner due to its position on international trade routes in the Indian Ocean. China has established its influence through a free trade agreement and significant infrastructure investments (over USD 1.2 billion) under the Maritime Silk Roads project. The change of government in 2018 revived the struggle for influence, with the new coalition expressing its desire to renew historical ties with India.

 

Last update: February 2020

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