Update Country Report Maldives 30 Jul 2020

Event

According to data released by the Maldives Monetary Authority (MMA, the central bank), merchandise exports fell by 63.9% year on year in May, while imports declined by 56.5%. This compares with falls of 54.5% and 53.5% respectively in April.

Analysis

The steep decline in merchandise exports and imports in April and May was mainly the result of crippled domestic and external demand amid the coronavirus (Covid-19) pandemic. In fact, trade has been on a downward trend since the start of 2020; while merchandise exports stood at US$40.2m in January and imports at US$241m, they fell respectively to US$11.5m and US$99.7m in May.

The country's merchandise export sector is quite small, with fish and fish products being its only major export commodities. Fish exports fell by 44.4% year on year in May. The slump in merchandise imports was broad-based, with heavy declines recorded across all goods categories. Food items (vegetables, fruit, dairy products etc) and petroleum products, which together account for nearly 40% of total merchandise imports, fell year on year by 44.2% and 85.1% respectively. The slump in imports of petroleum products was largely attributable to lower global crude oil prices.

The suspension since March of tourism activity (the largest source of foreign exchange) has also taken a heavy toll on the country's foreign-exchange reserves. According to the IMF's International Financial Statistics, gross international reserves declined consistently in the second quarter of 2020, from US$898.6m at end-April to US$711.6m at end-June. The country's international reserves position was already weak; in 2019 it was estimated to provide cover for just 2.5 months' worth of imports of goods and services-lower than the Fund's recommended level of at least three months for developing economies. Although the international reserves position is likely to improve gradually in the coming months (tourism activity resumed partially in mid-July), reserves will remain below the levels recorded in 2019. That said, the country is unlikely to experience a severe balance-of-payments crisis during the forecast period.

Impact on the forecast

The latest merchandise trade data reinforce our view that both exports and imports will dip in 2020. However, imports will decline at a faster rate than exports, as a result of which the merchandise trade deficit will be narrower in 2020 than in 2019. Gross international reserves will slide to US$615m in 2020, from US$763m in 2019.