Update Country Report Maldives 13 Feb 2020

Economic growth decelerated in the third quarter of 2019, largely owing to a slowdown in the services sector amid weak earnings from tourism. Even if activity picked up in the final quarter of 2019, growth prospects for the Maldives have dimmed since the outbreak of a novel coronavirus originating from the Chinese city of Wuhan in January this year. The Economist Intelligence Unit, however, believes that an anticipated downturn in economic activity as a result of a drop in tourist arrivals from China will prove temporary. We forecast that activity in the tourism sector will rebound slowly from the second quarter of this year.

According to quarterly national-accounts data released by the National Bureau of Statistics, real GDP grew by 4.6% year on year in the third quarter of 2019-weaker than the 7.7% increase recorded in the previous quarter. Growth in the tertiary (services) sector, which accounts for about three-quarters of real GDP at factor cost, slowed sharply to 3.7% year on year in July-September, from 8.1% in the preceding three-month period.

Weakness in the services sector

Output from tourism, and transport and communication-the two key segments within the services sector-increased by 5.4% and 9.2% year on year respectively, considerably weaker than the double-digit gains recorded in the previous quarter. Earnings from wholesale and retail trade activity fell by 8.3%, compared with the year-earlier period, marking five consecutive quarters of decline.

The primary sector, which is relatively small (in terms of its share of GDP at factor cost) grew at a rapid rate of 8.1% year on year, rebounding strongly from mild contraction in the previous quarter. Output from construction activity, which had been on a downward trend since the final quarter of 2018, also rebounded and grew by 5.7% year on year. The decline in this segment reflects the negative impact of the gradual unwinding of infrastructure projects agreed with Chinese investors by the previous government. We believe that the construction sector will once again falter in the coming months as the government continues to scale down infrastructure projects, and is unlikely to gain momentum before 2021.

Coronavirus outbreak will hurt the tourism sector

The latest tourist arrivals data published by the Maldives Monetary Authority (MMA, the central bank) indicate healthy growth in tourism activity in October-November 2019. This suggests that the pace of real GDP growth seen in July-September 2019 is likely to have been sustained into the final quarter of 2019. However, the recent global outbreak of the novel coronavirus will have adverse effects on the tourism industry, at least in the first quarter of this year, as many cities in China have been locked down, forcing many to abandon their travel plans over the Lunar New Year holidays.

The novel coronavirus is highly contagious and human-to-human transmissions have infected more than 45,000 people worldwide. In order to contain the spread of the virus, governments across the world-particularly in China, which has been the epicentre of the outbreak-are discouraging international movement of people into or out of that country. On January 29th the minister of tourism, Ali Waheed, announced during a press conference that more than 2,000 upcoming tourist bookings (out of which close to 1,500 had been made by Chinese nationals) had been cancelled following the outbreak.

Growth downgrade

China is the largest source of inbound visitors for the Maldives, accounting for nearly one-fifth of the total number of international tourists to the country. The disruption, however, is likely to prove temporary. We have downgraded our 2020 GDP forecasts for a host of countries in Asia. These downgrades assume that the authorities in China will manage to contain the spread of the novel coronavirus by March. We will revise down our current growth estimate of 6% for the Maldives in the light of the weaker than expected data for the third quarter of 2019. We will also revise down our 2020 GDP forecast, which currently stands at 4.7%, to factor in the negative impact on the tourism sector from travel restrictions imposed since the outbreak of the novel coronavirus.