Update Country Report Maldives 18 Dec 2020

Event

In its monthly statistics release for November 2020, the Maldives Monetary Authority (MMA, the central bank) published data for the first ten months of the year, including merchandise exports, imports and foreign-exchange reserves.

Analysis

During January-October 2020 domestic exports (including re-exports) fell by 6.1% year on year, led by a 5.4% decline in fish exports, which account for the vast bulk of shipments. Merchandise imports fell by 34.4% over the same period, as the restrictions imposed by local authorities to curtail the spread of the coronavirus (Covid-19) crippled domestic demand. The slump in imports was broad-based, with double-digit declines across all categories.

With imports far outweighing exports in value terms, the balance on the goods trade account remained in the red. However, the sharp decline in imports and the relatively shallow decline in exports led to a narrowing of the deficit-a trend that The Economist Intelligence Unit expects to continue in the last two months of 2020. As demand begins to pick up both globally and domestically (as more tourists visit the islands) from mid-2021, the merchandise trade deficit will begin to widen gradually.

Meanwhile, foreign-exchange reserves fell from US$767m at end-January to US$629m at end-November, having proved volatile over the period. Foreign-currency reserves had surged above US$800m in April and May, just before tourism activity in the country (the largest source of foreign exchange for the Maldives) was suspended, with the closing of the country's border. Despite re-opening since July 15th, tourism receipts have failed to rebound, with monthly tourist arrivals continuing to record year-on-year declines in the range of 70-90%.

While lower reserves equivalent to only 0.2 months of import cover (based on 2019 data) makes the peg between the rufiyaa and the US dollar vulnerable, especially given the scale of the country's external liabilities, significantly lower imports in 2020 and a US$150m swap line between the MMA and the Reserve Bank of India (India's central bank) has helped to ward off pressure.

Impact on the forecast

The latest data are in line with our estimates of a narrower trade deficit and lower foreign-exchange reserves in 2020. We maintain our view that the rebound in imports will outpace exports, leading to a widening of the deficit in 2021. While the exchange rate will come under pressure in 2021, we maintain our view that the rufiyaa-US dollar peg will be maintained in that year