Maldives seeks alliances with China as Fitch downgrades its credit rating to junk status

Maldives Trade Minister Mohamed Saeed held discussions with senior officials from Chinese banks to form strategic alliances aimed at boosting the Maldivian economy.

This comes as the US credit rating agency Fitch downgraded Maldives’ credit rating to junk status, raising concerns about the country’s ability to repay its foreign debt.

High-level talks with Chinese banks

While attending the 15th World Economic Forum in Dalian, China, Saeed met with senior officials from the China Industrial and Commercial Bank (ICBC) and the Bank of China.

These discussions focused on strategies for further engagement and strengthening cooperation between China and the Maldives.

Saeed’s visit follows President Mohamed Muizzu’s state visit to China in January, where he met with Chinese President Xi Jinping.

Fitch downgrades Maldives’ credit rating

On Wednesday, Fitch downgraded Maldives’ Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘B-’ to ‘CCC+’. Fitch typically does not assign outlooks to sovereigns with a rating of ‘CCC+’ or below. The downgrade reflects increased risks associated with Maldives’ worsening external financing and liquidity metrics.

Fitch noted that Maldives’ foreign reserves declined to $492 million in May 2024 from $748 million the previous year, highlighting a persistently high current account deficit.

Fitch’s commentary indicated that Maldives’ foreign reserves would remain under significant stress in the coming year.

The Maldives Monetary Authority (MMA) has continued interventions to support the currency peg, and the repayment of a $100 million swap arrangement with the Reserve Bank of India in December 2023 has further strained reserves.

Gross foreign reserves, net of short-term foreign liabilities, were significantly lower at $73 million.

Future debt obligations

According to Fitch, Maldives faces $233 million in sovereign external debt-servicing obligations and $176 million in publicly guaranteed external debt-servicing obligations due in 2024.

These figures will rise to $557 million in 2025 and exceed $1 billion in 2026.

Official data from 2023 shows that Maldives’ foreign debt stands at over $4 billion, with approximately $1.5 billion owed to China, its largest lender.

Discussions on free trade agreement

Saeed also met with Chinese Minister of Commerce Wang Wentao to discuss the free trade agreement (FTA) between the Maldives and China.

There were no mentions of discussions regarding Maldives’ requests for China to restructure its debt.

Last month, Chinese envoy to the Maldives Wang Lixin stated that China has no plans to restructure the debt owed by Maldives, as it would hinder the country from securing new loans.

Economic challenges ahead

As a global holiday destination, Maldives relies heavily on tourism for foreign exchange revenues. Without debt restructuring, Maldives risks facing a situation similar to Sri Lanka’s sovereign default in 2022.

The Maldivian government must navigate these financial challenges carefully to avoid further economic distress.

The discussions between Maldives and Chinese banks are critical in addressing the country’s financial challenges amid a downgraded credit rating.

As Maldives continues to seek strategic alliances and manage its substantial debt obligations, the outcomes of these negotiations will play a crucial role in its economic stability and growth.

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