Update Country Report Maldives 15 Oct 2020

• The Maldivian economy contracted by 51.6% year on year in the second quarter of 2020, scuppered by the suspension of tourism-the main driver of economic growth.
• Following the reopening of borders on July 15th, tourist arrivals in the archipelago have reached a mere trickle, remaining down by 95% year on year in the third quarter.
• Despite the reopening of borders, uncertainty over global restrictions on foreign travel will result in a slower and more gradual recovery in tourist arrivals in the Maldives.
• The Economist Intelligence Unit expects the economy to bounce back in 2021, but GDP will remain below its 2019 level even at the end of 2022.

According to data released by the National Bureau of Statistics, real GDP contracted by 51.6% year on year in the second quarter of 2020, depressed by a similarly sized 49% contraction in the tertiary (services) sector. This sector accounts for around three-quarters of total GDP. The much smaller primary and secondary sectors, which together make up a quarter of GDP, contracted by 38.2% and 38.9% respectively, but this was partially offset by growth in public administration and financial services.

Suspended tourism sinks the economy

Within the services sector, tourism activity is the single largest component, making up around a quarter of total GDP alone. The economy's historically lopsided reliance on tourism earnings has taken a heavy toll on it amid the ongoing coronavirus (Covid-19) pandemic.

In late March the Maldivian government closed down the country's borders in a bid to contain the spread of the virus, effectively suspending all tourism activity until mid-July, when the archipelago was re-opened to international tourists. The shutdown of the tourism sector throughout the second quarter of 2020 resulted in a 98% year-on-year drop in its value added. In terms of its share of real GDP, tourism made up just 1% of total output in April-June. Furthermore, tourism is interconnected with other sectors that account for a larger share of GDP, such as transportation and communication and wholesale and retail trade. Output from these two sectors declined by more than 50% year on year.

Bumping along the bottom

Following the easing of restrictions on July 15th, data released by Maldives Immigration indicate that tourism got off to a tepid restart in the third quarter. Even though total tourist arrivals into the country increased to 18,918 in July-September, this was still down by 95% year on year. The data for September showed only 9,538 tourist arrivals, compared with 117,619 in the same month of 2019. Interestingly, the bulk of tourists arrived from Russia, the UAE and the US, while the number of visitors from China, India and the EU, which have traditionally been the largest sources of inbound tourism for the country, remained quite low. This could be indicative of ongoing foreign travel restrictions in mainland China and worrying coronavirus trends in Europe, which could result in tighter restrictions on travel and re-entry, weighing negatively on tourism activity.

While the worst might be over for the Maldives' tourism industry (and, by extension, real GDP), the weak rebound in tourist arrivals in the third quarter suggests that the economy will remain in contractionary territory in the second half of 2020. That said, we expect the rate of decline to slow in the subsequent quarters. Reflecting this, we will be revising down our annual estimate for real GDP growth in 2020 to -29.5%, from -15.2% currently.

A gradual recovery

Economic recovery in the Maldives will be tied closely to improvement in international travel and tourism expenditure, with the latter depending on rising personal disposable incomes and higher appetite for discretionary spending. While an expected rebound in economic growth during 2021 in the country's key sources of visitors-the EU, China and India-will support recovery in tourism receipts, we expect tourist arrivals to the archipelago to pick up only gradually in 2021-22, as restrictions on foreign travel, as well as quarantine rules upon re-entry, will remain uncertain and volatile in the near term.

In light of the latest data, we will be amending our growth outlook for the Maldives in our October country report. Following a deeper than expected contraction in 2020, we expect the economy to stage a partial recovery in 2021, on account of continued construction undertakings and the fading of the coronavirus-induced drag on tourism. Consequently, we will be revising up our growth forecast for the year to 21%, from 8% currently. We expect real GDP growth to slow to 10.7% in 2022, but this will still be faster than the pre-pandemic average, as we expect growth in tourist arrivals to gain momentum in the latter half of the year. However, despite double-digit growth rates, we do not expect real GDP to grow back to its 2019 level in the forecast period.