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 expect real GDP to contract by4.3% in 2020, largely owing to the disruption to the tourism sector in the wake of the coronavirus pandemic. Economic growth will pick up in 2021 as the global economy gradually recovers.
• The current-account deficit will widen in 2020, mainly owing to a narrowing in surplus on the services account. As tourism activity picks up in 2021, the tourism-related surplus on the services account will expand, resulting in a narrower current-account deficit.

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Key changes since December 14th

• An anticipated increase in expenditure has prompted us to revise our fiscal forecasts. We now expect the nation to record a budget deficit equivalent to 7.4% of GDP in 2020, compared with 3.2% previously.
• Owing to severe disruption to the tourism sector, we expect the services sector to contract in real terms in 2020. Consequently, we now forecast that real GDP will shrink by 4.3% in 2020, compared with 4.7% growth previously.
• We now expect consumer prices to decline by 0.6% in 2020, compared with our previous forecast of a 0.3% fall. The change is in line with a sharp downward revision to our global oil price forecast for 2020 and weak domestic demand conditions this year.

The quarter ahead

• April 26th-GDP data (Q4 2019): The data release will show whether the deceleration in real GDP growth in the third quarter of 2019 has persisted. We expect economic growth to have slowed further in the final quarter of 2019, compared with the third quarter.
• May TBC-Tourist arrivals data (March 2020): Tourism activity is one of the main drivers of economic growth in the country and the largest contributor to the services trade surplus. This release will provide a complete picture of tourist arrivals for the first quarter of 2020 and we expect this to be much weaker 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 2019: Rf15.38: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 (Ramadan holiday); May 24th-26th (Eid-ul Fithr); July 26th (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 has just five 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 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 has launched an appeal against his conviction.

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.

The latest parliamentary election was held in April 2019. Mr Solih's MDP, which leads the governing coalition, secured a sweeping majority in the 87-seat People's 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, in which Mr Solih defeated Mr Yameen. 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 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 (FTA) 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) has 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. China is the largest source of tourists for the Maldives and accounted for 17% of the 1.7m tourists who arrived in the country in 2019.

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 Maldives re-joined the Commonwealth in February 2020, following the country's departure from the association in October 2016. India was one of its strongest supporters in the bid for readmission and had called for the expedition of the process on several occasions. The inclusion of the country in the Commonwealth will boost the government's efforts to showcase the country as a progressive and stable democratic player on the international scene. It will also enable the country to forge deeper diplomatic ties with other major democracies, including Canada, Australia, New Zealand and the UK and engage more closely with the wider international community.

The economy is dominated by the tourism sector. The nation attracted thousands of tourist arrivals before the coronavirus pandemic. Recognising the threat posed by inbound cases of the virus, the government gradually closed its borders to incoming tourists from the worst-affected countries and finally stopped issuing visas on arrival for all nationalities on March 27th. The suspension of tourism activity has hit the economy hard and the government announced a fiscal stimulus package worth Rf2.5bn (US$170m) to provide some relief to businesses. As the government steps up spending to deal with the public health emergency, the budget deficit will widen and public debt will rise further in 2020. As the health crisis ebbs, Mr Solih's administration will tackle the corruption and human rights abuses that spread under the previous administration. He will also seek to bring reforms to the judiciary 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 inherited significant external debt associated with the Maldives' infrastructure spending boom under Mr Yameen. The servicing of this debt is one of the prime reasons behind the nation's persistent budget deficits. Increased expenditure will be required in 2020 to offset the loss in revenue from tourism, owing to the restrictions imposed on foreign tourist arrivals to slow the spread of the virus. Moreover, a recession this year will suppress revenue collection, which will lead to an increase in the deficit. We expect the budget deficit to widen to the equivalent of 7.4% of GDP in 2020 from an estimated 5.4% in 2019. The shortfall in the budget will narrow in 2021, partly on account of higher government receipts as the economy stages a recovery.

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. The MMA lowered the minimum reserve requirement to 5% in March to provide additional liquidity support to banks during the ongoing economic slowdown. On the whole, we believe that the central bank will maintain an accommodative policy stance in 2020-21 to support the economy.

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The impact of the coronavirus

The novel coronavirus (Covid-19) that originated in Wuhan, central China, in December 2019 is now a global pandemic. The Economist Intelligence Unit assumes that the virus will infect about 50% of the world population; 20% of cases will be severe and 1-3% will result in death. Death ratios will depend on the capabilities of countries to detect, track and contain the epidemic, and on the capacities of national health systems. We believe that a mass vaccine will be available at end-2021 (at the earliest) and that the coronavirus will become a seasonal disease, with another outbreak in winter 2020/21. Quarantine measures will be effective in limiting the spread of the disease, but they will have severe negative economic consequences. In addition, disruption to global supply chains will be severe. Overall, we forecast that global output will contract by 2.2% in 2020, and that global trade will drop by 1.4%. All G7 countries and almost all G20 countries will experience a full-year recession in 2020. We forecast real GDP growth in China of 1% in 2020 and a full-year recession of 2.8% in the US. Most countries have responded with huge fiscal expansion to support businesses and households, raising the risk of sovereign debt crises in the medium term. Central banks have cut interest rates and, more importantly, have stepped up as buyers of last resort for government and corporate debt.

The pandemic is at different stages in Asia. Those economies that were confronted by the virus first, including China, Hong Kong, Japan, Singapore, South Korea and Taiwan, managed to contain initial outbreaks in January and February through a combination of lockdowns, large-scale testing and contact tracing. However, they are now confronting a "second wave" of cases imported from new global hotspots and implementing fresh domestic and international travel restrictions. After lagging initially, emerging economies in South and South-east Asia are experiencing a jump in cases. Dense populations and inadequate healthcare infrastructure in such countries point to the risk that the coronavirus will have a devastating impact. India has responded through a 21-day nationwide lockdown; other countries are adopting similarly economically disruptive methods. Meanwhile, in Australasia, the virus has prompted quarantine measures and large stimulus packages in Australia and New Zealand, and has begun to intrude upon the Pacific Islands.

The spread of the virus in the Maldives has been contained in comparison with neighbouring South Asian countries. By April 13th only 20 cases of coronavirus had been reported in the Maldives, with no deaths. Except for the one most recently reported, the cases have been linked to either foreigners working or staying at tourist resorts or Maldivians who had returned from abroad. The government has handled the pandemic with great caution, as the risk of a rapid spread of infection was very high in the archipelago, which teems with foreigners. The country's borders have been closed for international tourists, and most guesthouses and resorts have been shut down across the country bringing tourism activity to an almost complete halt. Given the economy's heavy reliance on tourism earnings, the strict measures, which have undoubtedly helped to prevent a major public health crisis in the country, will result in significant economic disruption. Real GDP will decline sharply in 2020 and the economy will have to face wage cuts and increased unemployment. Fiscal and monetary stimulatory measures by the government and the Maldives Monetary Authority (MMA, the central bank), respectively, will provide some support but a recession will be inevitable this year.

The coronavirus pandemic will have a severe economic impact. Normally buoyant GDP growth in Asia and Australasia will come down sharply, to 0.5% in 2020. Global quarantine measures will result in a supply-side shock, hitting working hours and productivity. This will have knock-on effects for global supply chains, many of which are Asia-focused. Meanwhile, the region's trade-oriented economies will also face a demand shock, as export demand collapses in key Western markets. Those economies that are less dependent on trade will not be insulated. Domestic demand will slump as consumer confidence falls and households restrict spending to essential items in the short term. Fear of contagion will prompt people to avoid public spaces, and tourism will not resume normally for a lengthy period. Businesses will face operating challenges, and even those strong enough to weather the storm are likely to delay investment. Foreign direct investment (FDI) flows in the region will slow markedly.

The political and geopolitical impact could be seismic. In the short term, a failure to address the humanitarian or economic crisis triggered by the coronavirus could bring down administrations, either through the ballot box or via social unrest. Even governments in non-democratic countries will face intense scrutiny over their response to the epidemic. The crisis may deepen the backlash against globalisation and open borders. The competition for global leadership between China and the US will intensify, as the countries exchange criticism over their handling of the crisis. This will strain security relations within Asia, and the distraction of major powers may encourage opportunism among some regional actors.

Economic growth

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 2019. The lopsided reliance of the economy on the tourism sector makes it extremely vulnerable during the coronavirus pandemic. The tourism sector will take a major hit in 2020 as government restrictions on foreign arrivals, coupled with widespread wariness about international travel, will crimp activity. Although fiscal and monetary stimulus will provide support, it will not be enough to stop the economy from sliding into recession this year. Wage cuts and job losses stemming from the disruption to the economy from quarantine measures will curtail household spending. Consequently, we expect private consumption expenditure to decline by 2%. Overall, real GDP will shrink by 4.3% in 2020.

In the following year as the world recovers from the aftermath of the coronavirus pandemic, global economic conditions will start to improve. The tourism sector would slowly pickup, driving a modest increase of 2.7% in real GDP in 2021.

In 2019 average year-on-year growth in consumer prices was almost flat. We believe that consumer prices will decline by 0.6% in 2020, owing to an anticipated decline in global oil prices and weak domestic demand. In 2021, however, it will return to positive territory, averaging a modest 0.2%, driven by some recovery in global oil prices and a modest pick up in economic growth.

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$741m at end-March, are relatively low compared with the monetary base (around Rf13.1bn, or US$852m, at end-March, 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 later this year, with a view to weakening the currency, which would boost the attractiveness of the nation as a tourist destination. 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 6.3% in US-dollar terms in 2019 (latest data from the MMA) and imports declined by 2.4%. We expect the goods trade deficit to be narrower in 2020, compared with 2019, as imports decline at a faster rate than exports.

Tourism accounts for almost 90% of the total value of services exports. Tourist arrivals grew at the strong pace of 14.7% in 2019. Although the services trade account 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 primary and secondary income accounts remaining in deficit, we forecast that the current account will remain in deficit in 2020-21. On account of a significant slowdown in tourism activity in 2020 amid the coronavirus pandemic, the services surplus will shrink this year. Consequently, we expect the current-account deficit to expand to the equivalent of 26.8% of GDP in 2020, from an estimated 21.4% in 2019. As external demand starts to regain strength in 2021, export earnings will increase, which will be partly responsible for the contraction in the current-account shortfall to 21.8% of GDP.

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