Political and economic outlook

• The Economist Intelligence Unit expects the new president, Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP), to serve a full term, ending in 2023. However, given the country's history of political instability, risks to this outlook are significant.
• Mr Solih's term is likely to be marked by intense competition between India and China to exert strategic influence on the Maldives. The new government's efforts to confirm and manage the amount of debt owed to China will strain diplomatic ties with that nation.
• The new 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 strong economic growth in India will support increased exports of tourism services to that nation in 2019-20. This will serve to drive average annual economic growth of 3.7% in 2019-20.
• 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 previous report

• This is The Economist Intelligence Unit's inaugural report for the Maldives, so the key changes section does not apply.

The quarter ahead

• February-Monthly statistics release (January): The data will provide an overview of the economic situation inherited by the new administration.
• February-March-External debt: The new government is likely to release updated official data about the scale of external public debt. Notably, this should clarify how much debt is owed to China.

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 85 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 March 2014; the next is due in April 2019

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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The country's new president, Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP), assumed office in November 2018. This completed a transfer of power that was surprisingly 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 prematurely ended 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.

Mr Yameen appears to have accepted the results of the September 2018 presidential election, which gave a clear mandate to Mr Solih, despite the incumbent having used various tactics to tilt the vote in his favour. Mr Solih's MDP leads the governing coalition that commands a majority in the People's Majlis (the legislature), with 46 out of the 85 seats. Nevertheless, the country's recent history and impending parliamentary elections in April 2019 suggest that the prospect of further political instability in 2019-20 will remain high. The danger of short-term instability will be particularly elevated following the 2019 polls as the newly elected members of the legislature work out coalition arrangements.

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 new 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.

Although the MDP's control of the presidency and its dominance in the legislature should aid political effectiveness, Mr Solih may face challenges from within the MDP. The president is thought to have a good relationship with Mr Nasheed, who returned to the Maldives from exile in November 2018. 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. Another potential rival is the speaker of the legislature, Qasim Ibrahim. Mr Ibrahim, a tourism magnate and former presidential candidate, heads the Jumhooree Party (JP), which has the highest number of seats in the legislature. His current support for Mr Solih is likely to prove fragile as the government seeks to tackle the country's economic woes.

Outside of the political sphere, there is some threat 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 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 latest election for the People's Majlis was held in March 2014, when an MDP-led coalition won a majority of seats in the chamber. The next legislative election is due in April 2019. The country will continue to follow a first-past-the-post system. Although it will be a multi-party election, the contest will be dominated by the country's three major parties: the MDP, the JP and the PPM. Given the recent wave in favour of Mr Solih, we expect the MDP to perform strongly. However, voter loyalties tend to be fluid.

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 22.1% of the 1.4m tourists who arrived in the Maldives in 2017.

Relations with India will warm under Mr Solih's government. India is set 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.

In his inaugural speech, Mr Solih highlighted the fact that the country faced a period of financial retrenchment as his government 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 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, largely owing 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 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 MMA 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, despite the rise in US policy interest rates in that year.

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The new 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. Fiscal retrenchment will also exert a negative influence on economic growth, with public consumption growth slowing in both 2019 and 2020. Efforts to scale down the ongoing infrastructure projects funded by Chinese loans acquired during Mr Yameen's presidency will also constrain economic growth during the forecast period, dampening investment. We expect these factors to result in a significant deceleration in economic expansion on average in 2019-20. Nevertheless, tourist arrivals from India and other markets (mainly European countries) will provide support for real GDP growth. Overall, we expect economic growth to average 3.7% a year in 2019-20.

Consumer prices contracted for most of 2018, and we estimate an annual average inflation rate of -0.5% for that year. Due in part to the influence of the peg between the rufiyaa and the US dollar and softer global oil prices, we anticipate that price pressures will remain muted in 2019-20. We forecast consumer price inflation to average 0.3% annually over the period.

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$592.2m at end-October 2018, are relatively low compared with the monetary base (approximately Rf10.7bn, or US$692m, at end-October based on MMA data). This renders the peg relatively vulnerable, particularly given the scale of 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. The bulk of the country's domestic demand is met from imports of consumer and capital goods. As a result, the country runs a wide deficit on the merchandise trade account. The goods trade deficit is likely to have widened significantly in 2018. Merchandise imports rose by 25.3% year on year in US dollar terms during January-October, according to the latest data from the MMA, while export growth was almost flat.

Tourism exports account for almost 90% of the total value of services exports. Tourism arrivals rose strongly in January-October, up by 7.3% year on year. 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 8.6% of GDP a year in 2019-20, against 17.5% in 2017-18, as weaker domestic demand will lower the import bill.

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