Update Country Report Maldives 01 Jun 2020

Economic growth picked up sharply in the fourth quarter of 2019 and was driven by the services sector, primarily through higher earnings from tourism and the communication and transportation sector. However, the latest tourism data show a sharp decline in arrivals in the first quarter of 2020, which suggests that the momentum behind real GDP growth will not sustain into the next quarter. The Economist Intelligence Unit believes that the tourism sector will take a major hit in 2020, as the coronavirus pandemic has severely curtailed economic activity, and the economy will slip into a recession this year.

According to quarterly national-accounts data released by the National Bureau of Statistics, real GDP grew by 8% on a year-on-year basis in October-December 2019, compared with 3.7% in the previous quarter. This was the fastest pace of annual economic expansion since the first quarter of 2018. Services are the dominant sector in the economy, accounting for three-quarters of total GDP. The acceleration in real GDP growth was driven primarily by this sector, which grew by 8.1% year on year.

Robust growth across all major sectors

Within the services sector, transport and communication services and tourism were the key drivers of the strong economic growth in the fourth quarter. Together these sectors make up around 40% of real GDP. Earnings from tourism activity rose by a healthy 9.8% year on year, compared with 5.4% in the previous quarter. The communication and transport sector, output in which is closely associated with tourism activity, expanded by 13.2% year on year.

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. However, this sector experienced a 14.6% year-on-year increase in October-December, due mainly to a rise in residential housing and new resort development projects that commenced recently. In contrast to the robust growth recorded in these sectors, output from retail trade declined by 4.1%, although that marked an improvement from the 18.1% contraction in the previous quarter, underpinned by stronger tourism performance.

Growth will be short-lived

Data released by the Ministry of Tourism showed that international tourist arrivals plunged by 20.8% year on year in January-March 2020. The decline, which was most prominent in March, is attributable to the restrictions imposed by the Maldivian administration on the entry of foreigners. These were part of wider efforts to contain the spread of the novel coronavirus. Since the virus originated in China, the government banned travellers from that country from entering the Maldives in early February, as a precautionary measure. China is the largest source of tourists to the Maldives, providing around 20 % of the total.

As the virus spread to other countries, the government gradually closed its borders to incoming tourists from the worst-affected areas and eventually stopped issuing visas on arrival for all nationalities on March 27th. The tourism data for the second quarter of 2020 will therefore show a more pronounced slump in international arrivals, which will ultimately translate into a decline in GDP.

From bad to worse

By the end of May the Maldives had recorded 1,313 active cases, five fatalities and 453 recoveries. The country appeared to have successfully contained the disease from spreading in the past month. The government has enforced lockdown measures in the greater Malé (capital) region since April 15th and shut down guesthouses and resorts across the country. However, on May 31st the country recorded a surge of 101 new cases. Despite this, the government is considering easing restrictions on the tourism sector, in response to industry requests.

On May 30th the Ministry of Tourism stated that the country would reopen its borders to visitors in July. To manage the flow of tourists, additional fees will be imposed for entering the country; according to the guidelines, visitors need to apply for a tourist visa ahead of their visit and pay a US$100 visa fee upon arrival. A swab test for the virus at the airport, at a cost of US$100, is also mandatory. (Before the pandemic a 30-day free visa was issued on arrival for all nationalities.) The new guidelines require a minimum stay of 14 days, and visitors must remain in one tourist facility. The complicated guidelines are likely to prevent a speedy recovery in the tourism sector. Furthermore, the suspension of international flights from key markets such as China, Italy, France and Germany will also hinder the pace of recovery.

Overall, despite the pick-up in real GDP growth recorded in the fourth quarter of 2019, the latest tourism data reinforce our view that this pace of economic expansion will not continue into 2020. We maintain our view that real GDP will register a 4.3% contraction in 2020 .