Political and economic outlook

• The Maldivian economy is heavily skewed towards the services sector, which makes up more than three-quarters of GDP and is led by tourism services. The country relies heavily on bilateral assistance for budgetary support.
• Although The Economist Intelligence Unit expects the ruling Maldivian Democratic Party (MDP) to complete its term in office, which expires in 2023, the risk of political instability has risen materially following the formation of two distinct factions in the MDP.
• Reviving tourism activity in the islands will be a priority for the government this year, and possibly next. Alongside international roadshows and loyalty programmes, a plan to offer vaccines to tourists will encourage extended stays in the country's resorts.
• After a deep recession in 2020, we forecast that real GDP will rebound by double digits in 2021, led by a doubling of tourist arrivals from 2020 levels. Even so, this means that both visitor arrivals and real GDP will be below 2019 levels by end-2022.
• We expect the peg to the US dollar to be maintained in 2021-22, despite low levels of foreign-exchange reserves. Recovering tourism receipts and a US$150m currency swap line with India will help to reduce pressure on reserves.
• The Maldives will be one of the first countries in Asia to achieve mass vaccination (by the end of the third quarter). It will be well positioned to benefit from the ongoing recovery in international travel compared with other tropical travel destinations.
• The Maldives' strategic location in the Indian Ocean will attract significant courting by countries like India, China and the US, which are vying to increase their influence in the region.

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Key changes since March 31st

• We now expect real GDP to rebound by 18.6% in 2021, slower than our previous forecast of 25%. The change was prompted by weaker than expected tourist inflows in the April-June quarter.
• We now expect the recovery in domestic demand to be pushed into 2022. This will result in a slower pace of import growth this year. Consequently, we expect the current-account deficit to stand at 20.8% of GDP in 2021, compared with 23.3% previously.

The quarter ahead

• TBC-Tourist arrivals (July-September): With the reopening of borders to travellers from South Asia from mid-July onwards, we expect tourist arrivals to gather momentum in the third quarter of this year after losing steam during the Covid-19 surge, both locally and in India, in April-June.
• 24th October-GDP (second quarter of 2021): After contracting for three consecutive quarters, real GDP will return to year-on-year growth in the second quarter of 2021. This will mainly be the result of a low base of comparison in 2020, when tourism activity was suspended owing to the pandemic.