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 reform and the 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 archipelago attracts interest from India and China. The government is likely to use the country's location to garner financial concessions from both countries in 2020-21.
• We expect real GDP to contract by 15.2% in 2020, largely owing to the disruption of the tourism sector in the wake of the coronavirus (Covid-19) pandemic. Economic growth will pick up in 2021 as the global economy recovers gradually.
• The current-account deficit will widen in 2020, mainly owing to a narrowing of the surplus on the services account. As tourism activity picks up in 2021, the related surplus on the services account will expand, resulting in a narrower current-account deficit.

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Key changes since April 13th

• An anticipated increase in expenditure has prompted us to revise our fiscal forecasts. We now expect the government to record a budget deficit equivalent to 7.8% of GDP in 2020, compared with 7.4% of GDP previously.
• Owing to severe disruption in 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 15.2% in 2020, compared with our previous forecast of a 4.3% contraction.
• We now expect consumer prices to decline by 1.7% on average in 2020, compared with our previous forecast of a 0.6% 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

• TBC-Tourist arrivals data (July 2020): Tourism activity is one of the main drivers of economic growth in the country and the largest contributor to the services trade surplus. Data for this month are likely to show a small flow of international tourists visiting the islands, after a four-month hiatus when tourist visas were suspended.

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 from 1978 to 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; the MDP holds 65 seats in the 87-seat legislature, while the PPM has just five. The ruling party's huge majority in the Majlis gives the government a free hand to push through its policy agenda.

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. However, this will not have a significant impact on the stability of the government.

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 ruling MDP's control over the presidency and the executive will aid political effectiveness and ease 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, which 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 influential opposition figures.

That said, Mr Yameen-one of Mr Solih's most formidable opponents-is now serving a five-year jail sentence after being convicted in a money-laundering case 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, when 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 poll 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 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, which was signed during Mr Yameen's presidency, remains in limbo, as it is currently being reviewed by Mr Solih's administration.

By contrast, relations with India have strengthened under Mr Solih, 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 from both countries, including several 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 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.

The Maldives re-joined the Commonwealth in February 2020, following its departure from the association in October 2016. India was one of the strongest supporters of the country's bid for re-admission and had called for the expedition of the process on several occasions. Inclusion 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 to engage more closely with the wider international community.

The economy is dominated by the tourism sector. However, recognising the threat posed by inbound cases of the virus, the government gradually closed its border 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 reform 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 corruption.

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 for the country's persistent budget deficits. Increased expenditure will be required in 2020 to offset the loss of revenue from tourism, resulting from restrictions imposed on foreign tourist arrivals to stop 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 7.8% of GDP in 2020 from an estimated 5.5% of GDP in 2019. The shortfall in the budget will narrow slightly in 2021, partly on account of higher government receipts as the economy stages a recovery. Grants and loans received by the Maldivian government from other countries and multilateral donors will help to partially cover the fiscal shortfall. However the loans received to date will push up the country's debt/GDP ratio.

The primary job of the Maldives Monetary Authority (MMA, the central bank) is to maintain price stability, although legislation also tasks it with preserving 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 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: global and regional assumptions

The Economist Intelligence Unit's forecasts are built on a series of epidemiological assumptions about the novel coronavirus (Covid-19). Without rapid access to a vaccine, we expect that the disease will eventually infect up to 30% of the world's population; of the symptomatic cases, we assume that around 15% will be severe and up to 1% will prove fatal. Death ratios will depend on a country's ability to detect, track and contain the virus, and the capacity of its national health system. Governments are lifting restrictions on freedom of movement gradually in countries where the number of cases is falling and where there is sufficient spare capacity in the healthcare system. Some countries may be forced to reimpose measures if cases spike again. Based on previous viral outbreaks and the progress made on other coronavirus vaccines (such as that for severe acute respiratory syndrome, or SARS), we expect a vaccine to be available by end-2021.

In economic terms, we forecast that global output will contract by 4.8% year on year in 2020. We believe that trade disruption will remain severe and forecast that global trade will contract by 22.6% this year. We assume that oil prices will decline by more than 37% in 2020, to average US$4o/barrel, before they recover to US$44/b next year. Global GDP will not recover to pre-coronavirus levels before at least 2022; 2020 and 2021 will be lost years for growth. Real GDP will contract in all of the world's regions, but the drop in output will be especially severe in OECD countries (at 6%). All G7 countries and all but two G20 countries (China and Indonesia) will experience a full-year recession in 2020. We believe that the US's output will contract by 4.8% this year and expect China to record real GDP growth of 1.4%. Asian countries will recover the fastest, with some (including India and South Korea) returning to pre-coronavirus levels of GDP in 2021. G7 economies will recover more slowly. Real GDP will be back to 2019 levels in 2022 for Canada, Germany and the US, 2023 for the UK and 2024 for Italy. 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.

Asia and Australasia will experience a recession in 2020 for the first time since 1998, with regional real GDP forecast to contract by 1.8%. All countries in the region will see their economic performance affected by demand slumps caused by lockdowns within their own borders and those introduced in other countries. Among the region's major economies, Singapore is forecast to experience the steepest economic contraction in 2020, at 6%, followed by Thailand, India and Japan. Some trade-dependent economies, such as South Korea and Taiwan, will evince a degree of economic resilience because their early response to the pandemic allowed them to avoid costly nationwide lockdowns. Parts of Asia are still expected to post GDP growth in 2020, albeit at a much less rapid rate than normal. Vietnam's economy will grow by 3% this year and Indonesia's by 1%, while China's real GDP is forecast to expand by 1.4%, despite a steep economic contraction in January-March. While the pace of recovery will be sequentially weak in Asia in 2021, a low base of comparison will help to ensure that real GDP rebounds to growth of 5.4% that year.

The pandemic itself is at various stages in Asia. The countries that first experienced the virus, predominantly in North-east Asia and Australasia, are on the path towards economic normalisation and have ended lockdown policies. While fresh cases have emerged in such countries, including a recent cluster in China's capital, Beijing, they have been curtailed locally rather than through fresh nationwide restrictions. The picture in South-east Asia is mixed, with some parts of the region exiting lockdowns relatively smoothly from June. However, several countries-notably Indonesia-are loosening restrictions while still struggling to contain the spread of the coronavirus, which points to a worsening health crisis. There is a similar situation in South Asia, where the devastating impact of lockdown measures on informal parts of the economy is encouraging policymakers to loosen constraints on activity even though daily confirmed cases continue to grow rapidly.

By mid-July there had been nearly 3,000 cases of coronavirus and 15 deaths in the Maldives. 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 were closed to international tourists between late March and early July, bringing tourism activity to a complete halt. Given the economy's heavy reliance on earnings from that sector, 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 stimulus by the government and the Maldives Monetary Authority (the central bank) respectively will provide some support, but a deep recession will be inevitable this year.

The global political and geopolitical impact of the crisis will be significant. The pandemic has resulted in an extraordinary expansion of executive power, with limited parliamentary oversight. Elections have been cancelled in some countries. When the pandemic has passed, governments will face intense scrutiny of their response. Failure to address the humanitarian crisis triggered by the coronavirus could further erode trust in national institutions. A severe global economic crisis, followed by large-scale unemployment, could fuel a new wave of popular protests. The crisis may encourage support for the nation state and a backlash against globalisation and open borders. It will also intensify the competition for global leadership between China and the US, and a realignment of geopolitical spheres of influence may ensue in Europe, Africa and other regions.

Economic growth

The tourism sector accounts for almost one-quarter of the country's GDP, making it one of the main drivers of economic growth. 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 has made 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, crimp activity. Although fiscal and monetary stimulus will provide support, it will not be enough to stop the economy from sliding into a deep 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 15.2% in 2020. Although the country announced the reopening of its border on July 15th, visitor arrivals will be low as airlines struggle to adjust to the new global conditions and general caution amongst travellers. The extension of quarantine measures in source countries, such as China, will continue to dampen traveller sentiment.

In the following year, in the aftermath of the coronavirus pandemic, global economic conditions will start to improve. The tourism sector will pick up slowly, driving real GDP growth of 8% in 2021.

In 2019 average year-on-year growth in consumer prices was almost flat. We believe that consumer prices will decline by an average of 1.7% in 2020, owing to lower global oil prices and weak domestic demand. In 2021, however, inflation will return to positive territory, averaging 2.5%, 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, which totalled US$846m at end-May, are relatively low compared with the monetary base (around Rf13.7bn, or US$890m, at the same time, 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 government 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 domestic demand is met by imports of consumer and capital goods. Imports therefore far outweigh exports in value terms, 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 than in 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 the red 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 23.6% of GDP in 2020, from an estimated 18.8% of GDP in 2019. As external demand starts to regain strength in 2021, earnings from services exports will increase, which will result in a narrowing of the current-account deficit to 15.3% of GDP in that year.

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