Update Country Report Maldives 12 Nov 2020

Event

India's foreign secretary, Harsh Vardhan Shringla, visited Maldives for a two-day official trip that concluded on November 10th.

Analysis

In addition to meeting the Maldivian president, Ibrahim Mohamed Solih, Mr Shringla held a series of meetings with several key ministers in his administration; the speaker of the People's Majlis (the legislature), Mohamed Nasheed; and the leadership of the opposition coalition. Mr Shringla also met with his Maldivian counterpart, Abdul Ghafoor, to discuss bilateral relations. During his trip, four Memorandums of Understanding (MoUs) between India and the Maldives were signed, the most notable of which was the US$100m grant to fund the construction of the Greater Malé Connectivity Project (GMCP). Mr Shringla also reviewed progress in eight India-funded infrastructure projects currently being implemented in the islands.

On the Indian side, Mr Shringla's engagement with a host of Maldivian leaders, in the government and the opposition, reinforces the country's relations with the Maldives, which have prospered under Mr Solih. India has repeatedly lent financial support to the indebted Maldivian administration, the most recent instance of which was US$250m of budgetary support in September 2020. India's government is now seeking to establish more broad-based support for India across the Maldivian political spectrum to secure its position as the country's main foreign partner, amid the US's growing interest in the archipelago.

On the other side, Maldivian foreign policy has long been dominated by its substantial external financing requirement, stemming from a wide deficit on its current account and high levels of external debt, much of which is owed to China. The debt burden has shot up significantly amid the coronavirus (Covid-19) pandemic, as the main foreign exchange-generating tourism sector was suspended during the second quarter of the year and has remained in the doldrums since. This has prompted the US credit rating agency, Fitch Ratings, to downgrade Maldives' long-term Foreign Currency Issuer Default Rating from B to CCC. Given the urgent need for foreign exchange and financial support, the government of the Maldives is likely to seek more monetary assistance from India in the coming months.

Impact on the forecast

The visit reinforces our view that Maldives' growing external financing needs and India's strategic interest in the country will underpin strong Indo-Maldivian ties in 2021-22. A healthy diplomatic relationship between the two nations will ensure that India remains Maldives' key international partner amid overtures from China and the US.