Political and economic outlook

• The Economist Intelligence Unit expects the president, Ibrahim Mohamed Solih, of the Maldivian Democratic Party (MDP), to serve a full term, ending in 2023. The MDP's emphatic victory in the April 2019 parliamentary election will enhance political stability.
• The MDP's strong performance in the latest legislative election has ensured that the party now controls both the presidency and the legislature, which will aid political effectiveness and smooth policymaking for the government.
• The government will pursue policies designed to put the country's public finances back on a more sustainable footing after a bout of intense spending on infrastructure under the previous presidential administration of Abdulla Yameen Abdul Gayoom.
• We believe that economic growth will decelerate to an average of 4.5% in 2019-20, from 7.2% in 2017-18, owing largely to the downsizing of ongoing public infrastructure projects and slower export growth, resulting from falling tourist arrivals from China.
• Despite the tourism-related surplus on the services account, a wide merchandise trade deficit will ensure that the Maldives continues to post current-account deficits in 2019-20. The scale of the deficit will ease, however, as construction-related imports fall.

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Key changes since April 10th

• In view of data for 2018, we have revised our current-account forecast to reflect a wider shortfall in 2019-20. We now expect this deficit to average the equivalent of 21.4% and 14.1% of GDP in 2019 and 2020 respectively, compared with 12.7% and 6.6% of GDP earlier.

The quarter ahead

• July 29th-GDP data (Q1 2019): The data release will show whether the weakness in year-on-year real GDP growth in the final quarter of last year persisted at the start of 2019. We expect average real GDP growth to decelerate to 5% in 2019, from an estimated 7.5% in 2018.
• August-Tourist arrivals data (June): Tourism activity is one of the main drivers of economic growth in the country and is the largest contributor to the services trade surplus. We expect growth in tourist arrivals to moderate slightly in 2019-20.

Land area

298 sq km

Population

407,660 (2014 Population and Housing Census of Maldives)

Major islands

Thiladhunmathi Atoll (resident population 57,078 according to 2014 census; includes Miladhunmadulu group)

Northern Maalhosmadulu Atoll (resident population 15,819 in 2014 census)

Southern Maalhosmadulu Atoll (resident population 9,601 in 2014 census)

Malé Atoll (resident population 14,092 in 2014 census)

Capital

Malé (population 157,935 in 2014 census)

Climate

Tropical; average temperature range: 25-32°C

Weather in Malé (altitude 2.4 metres)

Average rainfall is 1,945 mm per year. There is a dry season from January to April and a rainy season from May to December

Languages

Dhivehi (official language; English also widely spoken among officials)

Measures

Metric

Currency

Maldivian rufiyaa. Rf1 = 100 laari. Average exchange rate in 2018: Rf15.39:US$1

Fiscal year

January 1st-December 31st

Time

5 hours ahead of GMT

Public holidays

January 1st (New Year); May 1st (Labour Day); May 6th (Ramazan holiday); June 4th-5th (Eid-ul Fithr); July 26th-27th (Independence Day); August 10th-14th (Eid-ul Al'haa); October 29th (National Day); November 3rd (Victory Day); November 9th (Mawlid al-Nabi); November 11th (Republic Day); November 29th (celebration of the day Maldives embraced Islam)

Official name

Republic of Maldives

Form of state

Presidential republic

The executive

The president is elected by direct popular vote; a cabinet is appointed by the president and approved by parliament

Head of state

Ibrahim Mohamed Solih (president)

National legislature

Unicameral parliament with 87 members. Legislators are elected by a simple majority in single-seat constituencies, and serve five-year terms

Legal system

Each inhabited island has a magistrate's court. There is also a network of other courts with varying specific responsibilities (such as a family court; juvenile court etc), as well as a High Court. The country's top judicial body is the Supreme Court

National elections

The last presidential election was in September 2018 and the next is due in September 2023; the last parliamentary election was in April 2019; the next is due in April 2024

National government

The Maldivian Democratic Party (MDP) controls both the presidency and the legislature

Main political parties

The MDP and the opposition Progressive Party of the Maldives (PPM), led by the former president, Abdulla Yameen Abdul Gayoom; the third-largest party, the Jumhooree Party, is allied with the current government

Key ministers

President: Ibrahim Mohamed Solih

Vice-president: Faisal Naseem

Defence: Mariya Ahmed Didi

Home affairs: Sheikh Imran Abdulla

Finance and treasury: Ibrahim Ameer

Foreign affairs: Abdulla Shahid

Central bank governor

Ahmed Naseer

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Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP) was elected as president of the country in November 2018. This completed a transfer of power that was notably smooth, given the country's recent volatile political history. Democratic institutions and accountability suffered under the long and autocratic presidency of Maumoon Abdul Gayoom, which lasted for three decades between 1978 and 2008. The subsequent presidency of the MDP's Mohamed Nasheed was ended prematurely in 2012 amid protests, with Mr Nasheed alleging that he was forced from office at gunpoint. The tenure of the most recent president, Abdulla Yameen Abdul Gayoom of the Progressive Party of Maldives (PPM), saw further instability. Mr Yameen (who is also the half-brother of Mr Gayoom) cracked down on his political opponents and clashed with other senior politicians, most notably his vice-president, Ahmed Adeeb, who was removed through a no-confidence motion during a state of emergency in 2015.

During the forecast period, the risk remains that Mr Yameen or Mr Gayoom could seek to oust the MDP president, using their support networks in the security forces or the courts. (Mr Gayoom was arrested during Mr Yameen's time in office on charges of trying to overthrow the administration; he was freed on bail after Mr Solih won the presidential election.) The country's economic position became more fragile during Mr Yameen's presidency. Efforts by the present administration to put it back on a more sustainable track could create the sort of social conditions conducive to protests that would provide an excuse for an intervention seeking to remove the government.

Following the legislative election in April 2019 Mr Solih's MDP has emerged as the single largest party in the People's Majlis (the legislature), unseating the PPM, which now has a greatly reduced representation. The MDP's emphatic victory and huge majority in the Majlis will give the government a free hand to push its policy agenda through parliament.

However, the rise of the MDP in parliament has also come at the expense of the Jumhooree Party (JP, the country's third-largest party and a key member of the ruling coalition), which has lost several of its seats. This puts the future of the coalition in jeopardy. Although Mr Solih has said that the coalition will remain in place, our core expectation is that it will fall apart within our forecast period (2019-20).

The JP is now more likely to join hands with the PPM in opposition than to accept a diminished role in the coalition with the MDP. The MDP would also prefer to see the JP leave the government rather than have to make concessions to it under the coalition agreement between the two parties (the JP holds a relatively insignificant five seats). The MDP now has more than enough seats to pass legislation in the Majlis, and does not need to rely on any other party for support. Any breakdown of the coalition will therefore not have a significant impact on the stability of the government.

Although the MDP's control of the presidency and the legislature will aid political effectiveness, Mr Solih may face challenges from within his own party. The president is thought to have a good relationship with Mr Nasheed, who returned to the Maldives from exile in November 2018 and was subsequently elected to parliament. However, the former president is unlikely to be comfortable accepting a secondary role in the government, and the risk of clashes between Mr Nasheed and Mr Solih will be high.

This risk was elevated in late May, when Mr Nasheed was appointed as speaker of the Majlis. Intra-party tensions had arisen from a disagreement between Mr Nasheed and Mr Solih over their preferred candidates for the job. Finally, to avert a potential crisis, Mr Nasheed was persuaded to forward his own candidacy for the post. Nonetheless, we still believe that political stability will be enhanced in the absence of any formidable opposition to the ruling MDP, although the danger of factional splits within the party will remain a risk throughout the forecast period.

Outside of the political sphere, there is a risk that Islamic militancy could lead to violence in the Maldives. A strict strain of Wahhabism is followed by many in the country, and dozens of residents are thought to have joined militant Islamic groups overseas in the last 20 years. There have been a number of incidents that have blended political and religious-based violence in recent years, including the killing of a liberal blogger, Yameen Rasheed, in 2017. The islands' many tourist resorts could prove to be vulnerable targets for Islamic terrorists if the security forces are unable to contain these threats at an early stage.

The latest parliamentary election was held on April 6th to elect representatives to the 87 seats in the People's Majlis. Mr Solih's MDP, which leads the governing coalition, secured a sweeping majority in the Majlis, with 65 seats. The main opposition PPM has been left beleaguered, with a sharp decline from 33 seats in the previous legislature to just five. The JP also experienced a fall in support, winning just five seats compared with 15 in the last election.

The most recent presidential election was held in September 2018; Mr Solih won 58.4% of the vote, against Mr Yameen's 41.6%. Presidential elections follow a two-round system. However, since Mr Solih and Mr Yameen were the only candidates in the 2018 election, the contest was decided by a simple one-round majority vote. The next presidential election is due in September 2023.

The country's diplomatic relations will be guided to a large extent by its huge external financing requirements, resulting from its massive current-account shortfall. Furthermore, its strategic location in the Indian Ocean has meant that it will continue to garner a lot of interest from India and China, which are keen to expand their influence in the region.

Relations between China and the Maldives, which prospered under the administration of Mr Yameen, have soured sharply under Mr Solih. We expect that the government will look to revise the terms of many of the deals agreed with Chinese companies. It will also refuse to pass the legislation needed to implement the free-trade agreement between the Maldives and China that was signed in December 2017.

We do not believe that suggestions by Mr Nasheed (and others) that the amount of debt owed to China is much larger than the government had previously admitted are well-founded. However, the terms on which the money has been lent are not transparent. Officials may well seek to renegotiate these debt deals, but we do not believe that China will be receptive. If the government presses its case too hard, it is likely that China will take steps to limit the number of Chinese tourists visiting the country. Chinese visitors accounted for 19% of the 1.5m tourists who arrived in the Maldives in 2018.

Relations with India will warm under Mr Solih's government. India has committed to provide additional financial support, partly offsetting the much reduced role of China in financing construction in the Maldives. Nevertheless, the local government is likely to look to balance the influence of India against other regional powers, such as the US and Japan, in order to maximise its negotiating power.

The government will work towards financial retrenchment as it looks to deal with the legacy of debt built up during an infrastructure construction boom under Mr Yameen's administration. The electorate will also be looking for the government to make rapid progress on tackling the corruption and human rights abuses that spread under the outgoing administration. Reforms to the judiciary will seek to improve its professionalism and to reduce its tendency to intervene in the county's political struggles. Nevertheless, we believe that the speed and scale of change may disappoint, particularly on the issue of tackling graft.

Based partly on the latest fiscal data from the Maldives Monetary Authority (MMA, the central bank), we estimate a fiscal deficit equivalent to 4% of GDP in 2018, owing largely to a pick-up in spending compared with the previous year. The fiscal balance is likely to remain in deficit over 2019-20, but the shortfall will shrink gradually, reaching 3.2% of GDP in 2020. The continued deficit will partly reflect a more transparent accounting of the country's fiscal liabilities, but also the increased burden of external debt repayment associated with the Maldives' infrastructure spending boom under Mr Yameen.

The MMA's main role is to ensure price stability, although legislation also tasks it with maintaining an adequate level of international reserves and promoting non-inflationary economic growth. The Authority achieves monetary stability partly through the peg between the rufiyaa and the US dollar. In view of the peg, the central bank has little scope to conduct an independent monetary policy. However, the MMA also uses minimum reserve requirements for banks and open-market operations as instruments to control credit creation and money supply. As economic growth will ease in 2019-20, we believe that the central bank will seek to maintain a fairly accommodative policy stance to provide support to the economy. Its actions should prevent market lending and deposit rates from increasing in 2019.

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The tourism sector accounts for almost a quarter of the Maldives' GDP, making it one of the main drivers of economic growth in the country. China is the largest source of visitors, accounting for almost a fifth of total tourist arrivals in 2018. However, the present government's difficult relationship with China is likely to lead to a significant slowdown in export growth in 2019, as Chinese tourist arrivals stagnate or decline on account of the bilateral tension. We expect growth in public consumption to slow in 2019-20 (compared with 2018) as Mr Solih's government proceeds with its planned fiscal retrenchment measures. This will also have a negative impact on economic growth. The previous administration, under Mr Yameen, undertook several infrastructure projects funded by Chinese loans. The incumbent government is making an effort to scale down these projects, which will weaken investment and constrain real GDP growth during the forecast period. Nevertheless, tourist arrivals from India and other markets (mainly European countries) will provide some support for real GDP growth. Overall, we expect economic growth to average 4.5% a year in 2019-20.

In 2018 consumer prices contracted by 0.1% on average. We expect consumer price deflation to persist in the forecast period, due in part to the influence of the peg between the rufiyaa and the US dollar, as well as softer global oil prices. We forecast that consumer prices will deflate by 0.5% a year on average in 2019-20.

The rufiyaa is pegged to the US dollar. The midpoint of the exchange rate is Rf12.85:US$1, and the rate is permitted to fluctuate within a band of 20% either side of this level. In recent years the currency has consistently tested the weak edge of the exchange-rate band. Gross international reserves, at US$778m at end-April 2019, are relatively low compared with the monetary base (approximately Rf13.4bn, or US$870m, at end-April based on MMA data). This renders the peg relatively vulnerable, particularly given the scale of the country's other external liabilities. There is a significant risk that the government could look to revise the peg in 2019-20, with a view to weakening the currency. However, a substantial depreciation does not form part of The Economist Intelligence Unit's core forecast.

Fish and fish products are the country's only major export commodities, while the bulk of the country's domestic demand is met from imports of consumer and capital goods. The value of imports is therefore far greater than the value of exports, and the country runs a wide deficit on the merchandise trade account. Despite goods exports rising by 30% year on year in US dollar terms during January-April 2019 (according to the latest data from the MMA) and flat import growth, the goods trade account will remain in deficit during the forecast period.

Tourism accounts for almost 90% of the total value of services exports. Tourism arrivals grew at healthy rate of 6.8% in 2018. However, we expect the increase in the surplus on the balance of services trade over 2018 to be insufficient to offset fully the jump in the merchandise trade deficit. With the currency remaining fixed at an overvalued level and the primary and secondary income accounts remaining in deficit, we forecast that the current account will remain in deficit in 2019-20. However, we expect the shortfall to be narrower during this period compared with 2017-18, averaging the equivalent of 17.8% of GDP a year in 2019-20, compared with 25.2% of GDP in 2017-18, as weaker domestic demand will lower the import bill.

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