Update Country Report Maldives 31 Oct 2019

Economic growth picked up sharply in the second quarter of 2019 and was driven by the services sector, primarily through higher earnings from tourism and the communication and transportation sector. There are suggestions, in the form of robust tourist arrivals in the first two months of the third quarter, that real GDP growth will remain healthy in the final months of this year. The Economist Intelligence Unit believes that a steady stream of visitors to the archipelago from Europe, China and India will continue to drive economic expansion in 2020-21.

According to quarterly national accounts data released by the National Bureau of Statistics, real GDP jumped by 9.4% on a year-on-year basis in April-June, compared with 4.7% in the previous three-month period. Services is the dominant sector in the economy, accounting for three-quarters of total GDP. The acceleration in real GDP growth was primarily driven by this sector, which grew by 7.8% year on year.

Services-led growth

Within the services sector, transport and communication services and tourism were the key drivers of the strong economic growth in the second quarter of 2019. Earnings from tourism activity-the economy's largest sector-surged by 17.8% year on year, compared with 7.1% in the previous quarter. The communication and transport sector, the output of which is closely associated with tourism activity, expanded by 11.3% year on year.

In contrast to the robust growth recorded in these sectors, construction output and wholesale and retail trade declined by 0.7% and 6.8% respectively. Construction activity has been on a downward trend since the final quarter of 2018, in line with the gradual unwinding of infrastructure projects involving Chinese companies.

Strong performance likely to be sustained into Q3

Data released by the Ministry of Tourism showed that international tourist arrivals increased by 8% year on year in July and by 12.4% in August. The robust rise in tourist arrivals at the start of the third quarter continued to be driven by strong inflows of visitors from the EU, who account for around half of total tourist arrivals. Within the EU, the highest shares of tourist arrivals came from Italy, the UK and Germany.

Tourist arrivals from China-the largest single national source of visitors-dipped slightly on a year-on-year basis in both July and August. Nevertheless, the healthy rate of inbound tourists from the EU and strong inflows from India will have boosted tourism earnings for the third quarter and consequently provided support to overall economic activity during that period.

Tourism will continue to promote growth

The current administration's efforts to scale down Chinese-funded infrastructure projects undertaken by the previous government will exert downward pressure on economic growth in 2020. However, we believe that this pressure will be more than offset by the rapidly expanding tourism industry. There remains a downside risk in 2020-21 that an unanticipated deterioration in ties between China and the Maldives could hurt the latter's tourism receipts. Nonetheless, there have been no signs so far of a slowdown in the number of Chinese visitors to the country. Moreover, tourist arrivals from India and other markets (mainly the EU) will provide further support for real GDP growth. In view of the latest data, we will revise upwards our projections for economic growth in 2019 and 2020 by factoring in higher tourism receipts than we had previously anticipated.