American credit ratings agency Fitch has downgraded the Maldives' rating to "CC" with the assumption that the country will not be able to repay foreign debt.
Fitch last downgraded the country's rating in June. The rating was downgraded to "CCC+" after "B negative" over the past two years.
Fitch usually changes the rating or makes a "rating revision" once a year. This is the first time a downward rating revision has been made within a short time.
Rising public debt and difficulties in securing external financing were the main reasons cited by Fitch for the rating downgrade.
With large amounts due as debt repayments in the coming days, Fitch expected the government to reduce external financing requirements with fiscal reforms.
Fitch further noted that the foreign exchange shortage will persist in the coming days because of an increase in public investment and expenditure on imports.
"This has resulted in persistent US dollar shortages, exerting pressures on the parallel market and reserve buffers, since its import cover has traditionally been much lower than in 'B'/'C'/'D' peers," Fitch said in its rating report.
"In addition, spillover effects on the banking system have become more prominent in recent weeks, with the banking system's US dollar liquidity tightening considerably," Fitch highlighted in reference to a decision by the Bank of Maldives (BML) to suspend dollar transactions from Rufiyaa accounts.
Additionally, Fitch noted that there is no guarantee that foreign assistance will be received and that the middle-term solution is the implementation of the government's fiscal reform agenda.
"However, we believe large and rising public debt with a lack of meaningful fiscal consolidation will increasingly become a constraint to receiving financial assistance. Support from IMF or other multilateral donors would most likely be contingent on debt restructuring," the report stated.
The government is also uncertain whether financing will be available in line with the government's medium-term financing plan.
Fitch noted the challenges in refinancing the USD 500 million sukuk due next year and challenges in accessing USD 200 million from the Sovereign Development Fund to pay USD 200 million in 2026 for the sukuk.
"We project the Maldives' elevated general government debt/GDP ratio (estimated at 109.4% at end-2023, excluding government-guaranteed debt) will further increase over the medium term, well above the projected 'B'/'C'/'D' median level," the report stated.
