Maldives: Tourism is back to pre-Covid levels and will help cushion the economy against external headwinds

Event  

Tourism in the Maldives is back to pre-Covid levels. Between December 2022 and March 2023, the total number of tourist arrivals exceeded 170,000, i.e. the same number as before the pandemic three years ago. The economy is reaping the benefits of this situation as it relies heavily on a successful tourism industry, but remains nevertheless constrained by a huge public debt.

Impact

The Covid-19 pandemic pushed the Maldivian economy into the abyss (real GDP contracted by 33.4% in 2020) as tourism was frozen for the rest of the year 2020. In normal times, tourism usually accounts for more than 80% of current account revenues and this explains why the Maldives were among the countries most affected by the pandemic fallout in Asia. The two following years, GDP growth sharply rebounded (+41.7% and +12.3% respectively) as tourism gradually recovered thanks to lifted mobility and border restrictions. As the figures of the first quarter of 2023 show, tourism arrivals have now returned to pre-Covid levels and are expected to keep GDP growth at high levels this year (+7.2%).

India, Russia (even amid the war in Ukraine) and the UK were the three most important source markets in 2022. The number of tourists from the USA and major EU market could fall this year on the back of weakening economic activity and high cost of living. However, the fact that the Maldives attract mostly luxury travellers might mitigate this risk somewhat. Still, in an uncertain international context, the expected surge in Chinese tourists will be welcome for the Maldives’ economy. China’s reopening is indeed likely to lead to a gradual return of Chinese tourists to Asian destinations such as the Maldives, where they made up the largest share of tourists during the decade between 2010 and 2019. Their return will also cushion the domestic economy against multiple external headwinds such as high geopolitical tensions and inflation. The latter has remained relatively low due to government price controls and because the local currency has been kept stable and pegged to the US dollar. After inflation ended at 3.3% in 2022, it could accelerate this year (it averaged at nearly 4% in the first quarter of 2023) as a result of rising public spending in construction, election-related expenditures, improving domestic demand and high energy prices.

Meanwhile, the country remains burdened by a heavy public debt, which is among Asia’s highest. Almost half of its debt is external and a large share of this is owed to China. Public debt was already very high before the pandemic (78.8% of GDP in 2019) as a result of large public investments in infrastructures, partly related to China’s Belt and Road Initiative. However, it ballooned to 154% of GDP in 2020 before receding to 115% last year. In the medium term, it is expected to further decline as a result of strong GDP growth, slowing borrowing and shrinking fiscal deficits (from double-digit levels between 2020 and 2022 to around 8.5% between 2023 and 2024), but is forecasted to remain above an elevated 100% of GDP by 2025. After having benefited from the G20 DSSI (Debt Service Suspension Initiative) in 2021 and 2022, the country continues to face a high financial risk. Its high external debt is particularly challenging given tighter global financial conditions, chronically weak external liquidity (foreign exchange reserves amounted to six weeks of import cover in early 2023) and a deep current account deficit (expected at 17% of GDP in 2023) are weighing on the country’s external financing needs. It is in this economic and financial context that the next presidential and parliamentary elections are scheduled to be held in September 2023. Incumbent President Solih, who won the Maldivian Democratic Party’s (MDP) primary elections and whose party won a historical landslide electoral victory in 2019, will seek re-election. As always, the domestic electoral campaign will be influenced by a struggle between pro-India and pro-China stances, as both giant countries are recurrently fighting for geostrategic influence in the small archipelago. Solih’s re-election would preserve New Delhi’s diplomatic and economic current relative advantage over Beijing.   

In the coming months, the ST political risk ratings (category 5/7) and business environment risk ratings (upgraded from category F/G to E/G in March) are expected to remain unchanged at moderately high levels. Moreover, the MLT political risk is likely to remain in category 6/7 given high external debt, costly fuel imports and climate change vulnerability.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com