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 firm control over the presidency and the legislature will aid political effectiveness.
• Mr Solih will continue to pursue socioeconomic reforms and development goals outlined in the Strategic Action Plan for 2019-23. However, progress on this front will be sluggish, owing to resistance to such plans within the political circle.
• Owing to its strategic location in the Indian Ocean, the country attracts interest from India and China. Diplomatic relations with India will continue to strengthen in 2020-21 as the administration shifts its focus away from China.
• We believe that economic growth will average 4.9% in 2020-21 as the economy adjusts to the government's planned fiscal retrenchment measures, which are likely to be imple-mented over the next few months.
• 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 2020-21. The scale of the deficit will ease, however, as construction-related imports fall.

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Key changes since October 7th

• In view of stronger than anticipated tourism activity data, we have revised up our 2019 and 2020 projections for real growth in exports of goods and services to 6% and 5.6% respectively. This compares with our previous forecasts of 4.2% and 4.5%.
• As a result of the above, we now expect real GDP to grow by 6% in 2019 and 4.7% in 2020, compared with 5% and 4% respectively in our earlier forecast.
• In line with the latest data, which show a modest pick-up in consumer price inflation, we have revised our projections for 2019 and 2020. We now estimate consumer prices to rise by 0.1% in 2019, before declining by 0.3% in 2020.

The quarter ahead

• January 26th-GDP data (Q3 2019): The data release will show whether the pick-up in real GDP growth recorded in the second quarter of 2019 persisted. We believe that although economic growth will remain healthy, it will decelerate modestly in the third and fourth quarters compared with the second quarter.
• February TBC-Tourist arrivals data (December 2019): Tourism activity is one of the main drivers of economic growth in the country and the largest contributor to the services trade surplus. The latest release will provide a complete picture of tourist arrivals for full-year 2019, and we expect this to be stronger than the previous year.

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); April 24th (Ramazan holiday); May 24th-26th (Eid-ul Fithr); July 27th (Independence Day-observed); July 31st-August 3rd (Eid-ul Al'haa); October 29th (birthday of Prophet Mohammed); November 3rd (Victory Day); November 11th (Republic Day); November 16th (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

Ali Hashim

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The government is headed by Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP) who was elected as president of the country in November 2018. This completed a transfer of power that was notably smooth, given the country's 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 Mr Solih's predecessor, 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.

Following the legislative election in April 2019 Mr Solih's MDP emerged as the single largest party in the People's Majlis (the legislature), unseating the PPM, the main opposition party, which now has a greatly reduced representation. In the 87-seat legislature, the MDP now holds 65 seats. Meanwhile, the PPM had just 5 seats. The MDP's huge majority in the Majlis gives 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 in 2020-21.

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.

The ruling MDP's control over the presidency and the executive will aid political effectiveness and smooth policymaking for the government. Mr Solih is committed to socioeconomic development and reforms and will continue to accord a high priority to these areas during his term in office. In October 2019 he unveiled the Strategic Action Plan 2019-23, a roadmap that will serve as a guide to his government's policymaking as it seeks to achieve its development goals. Despite Mr Solih's strong will to pursue reform measures, his ability to implement them will remain constrained by the presence of strong and influential opposition figures in the political arena.

That said, Mr Yameen-one of Mr Solih's most formidable opponents-is now in jail after being convicted in a money-laundering case and sentenced to five years in prison by a criminal court in November 2019. Mr Yameen's incarceration, although likely to be short-lived, will further boost the MDP's political position. Mr Yameen is still believed to have a support network in the judiciary and will in all probability be released on bail soon, assuming his appeal plea is accepted by the high court. A ruling is due in early 2020.

Although Mr Solih's government will not face any significant challenge from the beleaguered opposition, he may have to confront difficulties 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. On the whole, the Economist Intelligence Unit believes that political stability will not be threatened, although the danger of factional splits within the party will remain a risk throughout the forecast period.

Outside the political sphere, there is a risk that Islamic militancy could lead to violence in the Maldives. Many in the country follow a strict strain of Wahhabism, 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 Islamist terrorists if the security forces are unable to contain these threats at an early stage.

The latest parliamentary election was held in April 2019 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 previous 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 absence of Mr Nasheed (who was in exile) during the 2018 polls resulted in the elevation of Mr Solih as the presidential candidate for an MDP-led coalition against the then-ruling PPM. We expect Mr Solih to seek re-election for a second term in 2023. However, his candidacy is likely to be challenged by Mr Nasheed, who also would also be keen to return to power for a second time.

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 means 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. The trade deal that was signed during Mr Yameen's presidency remains in limbo, as it is currently being reviewed by Mr Solih's administration. We believe that the government will withdraw from this agreement within the forecast period.

In a television interview in October 2019, Mr Nasheed stated that the cost of infrastructure projects financed and implemented by Chinese companies has been inflated. He (and others) have suggested that the amount of debt owed to China is much larger than the government had previously admitted. However, we do not believe that these claims are well-founded. Yet 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 have strengthened significantly under Mr Solih's government, and the two countries will continue to deepen bilateral ties during the forecast period. Our view is supported by a number of visits by high-level officials of both countries (including a number of meetings between Mr Solih and India's prime minister, Narendra Modi). These have been carried out in quick succession in the last year, since Mr Solih came to power. 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 govern-ment 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 previous 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 graft.

The government will struggle to balance the fiscal finances in 2020-21, although some progress will be made on reducing the size of the budget deficit. We estimate that the budget deficit will narrow slightly to the equivalent of 3.5% of GDP in 2019, from 4% of GDP in 2018. The shortfall is expected to shrink further, reaching 3.2% of GDP in 2020 and 3% of GDP in 2021. 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 primary job of the Maldives Monetary Authority (MMA, the central bank) is to maintain price stability, although legislation also tasks it with maintaining an adequate level of international reserves and promoting non-inflationary economic growth. The MMA 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. We believe that the central bank will seek to maintain a fairly accommodative policy stance in 2020-21 to provide support to the economy. This is because real GDP growth will be weaker during the forecast period, compared with 2018-19.

In addition to its limited scope to conduct monetary policy, the MMA tends to be influenced by political considerations, as was highlighted by the premature departure of its most recent governor, Ahmed Naseer, in July 2019. The new governor, Ali Hashim, is a political appointee who served as finance minister (2008-10) in the previous MDP-led government during Mr Nasheed's presidency. However, we do not expect a major shift in the central bank's monetary policy stance under Mr Hashim's leadership.

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The tourism sector accounts for almost one-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 one-fifth of total tourist arrivals in 2018. The risk to our 2020 GDP forecast is to the downside. An unanticipated deterioration in the government's already difficult relationship with China could crimp tourism receipts if Chinese arrivals stagnate or decline. However, there have been no signs of this in 2019. In fact, in the first ten months of 2019 tourist arrivals from China grew by 18% year on year, compared with a decline of 6.6% in the same period of 2018. We expect growth in public consump-tion to average 5.3% a year in 2020-21 as the economy adjusts to the government's planned fiscal retrenchment measures, which are likely to be implemented over the course of 2020. Mr Yameen's administration under-took 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 in 2020, before it starts to pick up modestly in 2021. 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 4.9% a year in 2020-21.

In the first eight months of 2019 average year-on-year growth in consumer prices was almost flat. We believe that consumer prices will fall slightly in 2020, due in part to the influence of the peg between the rufiyaa and the US dollar, as well as softer global oil prices. In 2021, however, it will return to positive territory, averaging a modest 0.2%, driven in part by higher global oil prices.

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$605m at end-November 2019, are relatively low compared with the monetary base (around Rf10.6bn, or US$689m, at end-November, 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 govern-ment could look to revise the peg in 2020, with a view to weakening the currency. However, a substantial depreciation is not part of our 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 by 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. Goods exports rose by 13% year on year in US dollar terms in January-October 2019 (latest data from the MMA) and imports declined by 3.5%. However, the goods trade account will remain in deficit during the forecast period.

Tourism accounts for almost 90% of the total value of services exports. Tourist arrivals grew at a strong pace of 15.4% year on year in January-October 2019. Although the services trade balance has consistently recorded a surplus and is expected to continue to do so in the forecast period, this will be insufficient to offset 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 2020-21. However, we expect the shortfall to be narrower during this period compared with 2018-19, averaging the equivalent of 12.2% of GDP a year in 2020-21, compared with 25.6% of GDP in 2018-19, as weaker domestic demand will lower the import bill.

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