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 EIU expects the Maldivian Democratic Party (MDP) to complete its term in office, which expires in 2023, the risk of political instability has risen with the leader of the main opposition Progressive Party of Maldives (PPM) having been acquitted by the Supreme Court, making him eligible to contest the presidential election.
• A sustained recovery in tourism activity will be a priority for the govern-ment in 2022-23. Widespread booster vaccination, the "one island, one resort" set up for safe holidays, a lenient immigration policy (with no quarantine requirement) and initiatives such as offering vaccination to tourists will make the Maldives a preferred destination.
• The country's impressive vaccination coverage and liberal visa policies will provide tailwinds for economic growth over the next two years; real GDP is forecast to be 4% larger than 2019 levels by 2023. Easing of travel restrictions will boost both global tourism demand and competition from other travel destinations.
• We expect the rufiyaa's peg to the US dollar to be maintained in 2022-23, despite low levels of foreign-exchange reserves. A recovery in tourism receipts and a US$150m currency swap line with India will help to reduce pressure on reserves.
• The Maldives recorded 1.3m tourist arrivals in 2021, more than double the 2020 levels and far outpacing tourism recovery in several other tourism-dependent economies in Asia, including Sri Lanka, Fiji, Thailand and Indonesia.
• The Maldives' strategic location in the Indian Ocean will attract courtship by India, China and the US. Although not our forecast, a PPM victory in 2023 presidential elections is likely to be accompanied by a realignment away from India and towards China.

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Key changes since October 17th

• Factoring in a stronger-than-expected economic rebound in the third quarter and strong tourism inflows in the final quarter of 2021, we now estimate real GDP to have grown by 30% over the year (18.6% previously), following a 33.6% contraction in 2020.
• Softer-than-expected consumer price growth over six months to November 2021 has prompted us to lower our annual average estimate to 0.7%, from 2.3% previously.

The quarter ahead

• TBC-Tourist arrivals (January-March): The emergence of the Omicron variant of covid-19 pushed countries across the world to temporarily tighten travel restrictions, and a local surge in the Maldives in January will add further to trip cancellations. Tourism inflows from China around the Chinese New Year will be minimal.
• March 31st-GDP (2021): Real GDP is estimated to have rebounded strongly in 2021, from a deep recession in 2020, driven mainly by a stellar growth in tourism inflows over the second half of the year. The Maldives welcomed 1.3m tourists in 2021, more than double from 2020, and visitors stayed for three additional days on average relative to 2019..

Land area

298 sq km

Population

407,660 (2014 Population and Housing Census of Maldives)

Major islands

Thiladhunmathi Atoll (resident population 57,078 according to 2014 census; includes Miladhunmadulu group)

Northern Maalhosmadulu Atoll (resident population 15,819 in 2014 census)

Southern Maalhosmadulu Atoll (resident population 9,601 in 2014 census)

Malé Atoll (resident population 14,092 in 2014 census)

Capital

Malé (population 157,935 in 2014 census)

Climate

Tropical; average temperature range: 25-32°C

Weather in Malé (altitude 2.4 metres)

Average rainfall is 1,945 mm per year. There is a dry season from January to April and a rainy season from May to December

Languages

Dhivehi (official language; English also widely spoken among officials)

Measures

Metric

Currency

Maldivian rufiyaa. Rf1 = 100 laari. Average exchange rate in 2021: Rf15.38:US$1

Fiscal year

January 1st-December 31st

Time

5 hours ahead of GMT

Public holidays

January 1st (New Year); April 3rd (beginning of Ramadan); May 1st (Labour Day); May 3rd-5th (Eid-ul Fitr); July 10th-12th (Eid-ul Adha); July 26th (Independence Day-observed); September 27th (Quamee Dhuvas); October 9th (Mawlid al-Nabi); October 26th (celebration of the day that the Maldives embraced Islam); November 3rd (Victory Day); November 11th (Republic Day);

Official name

Republic of Maldives

Form of state

Presidential republic

The executive

The president is elected by direct popular vote; a cabinet is appointed by the president and approved by parliament

Head of state

Ibrahim Mohamed Solih (president)

National legislature

Unicameral parliament with 87 members. Legislators are elected by a simple majority in single-seat constituencies and serve five-year terms

Legal system

Each inhabited island has a magistrate's court. There is also a network of other courts with varying specific responsibilities (such as a family court or a juvenile court), as well as a High Court. The country's top judicial body is the Supreme Court

National elections

The last presidential election was held in September 2018; the next is due in September 2023; the last parliamentary election was held in April 2019; the next is due in April 2024

National government

The Maldivian Democratic Party (MDP) controls both the presidency and the legislature

Main political parties

MDP, led by a former president and current speaker of the People's Majlis (the legislature), Mohamed Nasheed; Progressive Party of Maldives (PPM); Jumhooree Party, allied with the current government

Key ministers

President: Ibrahim Mohamed Solih

Vice-president: Faisal Naseem

Defence: Uza. Mariya Ahmed Didi

Economic development: Uz. Fayyaz Ismail

Finance & Treasury: Ibrahim Ameer

Foreign affairs: Abdulla Shahid

Health: Abdulla Ameen

Home affairs: Sheikh Imran Abdulla

Tourism: Abdulla Mausoom

Central bank governor

Ali Hashim

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The ruling Maldivian Democratic Party (MDP) dominates the People's Majlis (parliament), with 65 of the 87 seats. This has enabled the president, Ibrahim Mohamed Solih, to pass the bulk of his administration's agenda. EIU's core forecast is that the MDP will serve out the remainder of its term, which expires in 2024.

The risks to political stability have risen however, after Abdulla Yameen Abdul Gayoom, the former president of the Maldives (2013-18), was acquitted from a five-year prison term in November 2021. This makes Mr Yameen, who leads the main opposition, Progressive Party of Maldives (PPM), eligible to contest the 2023 presidential election. He had lost the 2018 election with a 42% vote share, meaning that the MDP no longer enjoys a guaranteed victory in the poll.

Political infighting within the MDP has also weakened its support base, reflected in the party's defeat in local government polls in April 2021. The two main party figures-Mohamed Nasheed, leader of the MDP, speaker of the People's Majlis and a former president (2008-12), and Mr Solih-are believed to have often fallen out over matters of complacency and corruption in government functioning. Their tug-of-war has created confusion in the ranks of the party, as well as within the country's security forces. This could hinder the response in the face of a security threat to officials, locals and foreign tourists; however, we do not currently expect the impact of this to be significant. The Taliban's assumption of power in Afghanistan is also likely to embolden local fringe groups in the Maldives, increasing the risk of social unrest in the country.

Since surviving an assassination attempt in May 2021 (allegedly launched by a local Islamist group), Mr Nasheed has also been pushing for a national referendum to shift from presidential to parliamentary governance, which would enable a party to form a government via majority rather than through coalition negotiations under the current system. This has irritated the MDP's coalition allies, mainly comprising conservative lawmakers who view Mr Nasheed's stance as an attack on religion. Mr Solih seems to be in favour of supporting the parliamentary scheme after the 2023 presidential election, should he return as president, when he believes that the country's tourism industry will have emerged from the shadow of covid-19.

EIU believes that Mr Yameen's political comeback is likely to encourage Mr Nasheed and Mr Solih to lay their differences to rest, albeit temporarily, as an MDP victory in the upcoming presidential elections in 2023 remains paramount for both. On Mr Nasheed's part, this will require a softening of his demands for changing the country's political structure and pushing for controversial legislations such as the hate-crime bill (which is viewed by conservative lawmakers as an attack on religion) to heal internal party fractures, while Mr Solih will have to win back lost public support through supportive welfare schemes in 2022.

The next presidential election is due in September 2023 and the next parlia-mentary election in early 2024. In the previous presidential campaign, the absence of Mr Nasheed (who lived in exile in the UK) resulted in Mr Solih being chosen as the presidential candidate for an MDP-led coalition against the then incumbent PPM. The MDP's endorsement for the upcoming election will be contested by both individuals in the primary elections this time around. The losing candidate is likely to support the winning one in the presidential poll, despite their disagreements, in order to suppress the PPM's chances of victory.

A divided MDP will also encourage other contenders to enter the presidential race, but the PPM will remain its main contender. Mr Yameen's release has breathed life into the latter's effort to rally its support base by suggesting that the current administration's "India first" foreign policy threatens the country's sovereignty. For the public, however, growing tourism and trade ties with India likely overshadow security concerns from its military presence on the islands, suggesting that this campaign may not be a vote winner. Although a close call, we continue to expect the MDP to retain presidency in 2023 on the condition that it is able to heal internal fractures.

Maldivian foreign policy will continue to be guided by the country's substantial external financing requirements, resulting from a wide deficit on the current account and high levels of external debt, much of which is owed to China. Its strategic location in the Indian Ocean means that the Maldives will continue to garner interest from India and China, which are keen to expand their influence in the region.

Despite being divided over matters of corruption and religious extremism, the MDP lawmakers are united in their support for the administration's "India first" foreign policy. India has offered regular fiscal and investment support to the Maldives, and emerged as the main source of inbound tourism for the country in 2021. It is also operating a US$1.5bn line of credit to fund various projects, including the Greater Malé Connectivity Project, with the aim of matching China's role in the archipelago's infrastructure projects. We expect India to remain the first port of call for the Maldivian administration for economic and maritime aid in 2022-23.

By contrast, relations between China and the Maldives, which flourished under the administration of Mr Yameen, have had less room to prosper under Mr Solih. A PPM victory in 2023 would therefore also affect foreign relations of the Maldives, with realignment away from India and towards China under Mr Yameen's presidency. This remains outside our forecast, however. In the interim, the free-trade agreement with China that was signed in December 2017 remains in limbo and is unlikely to be implemented in 2022-23.

Under its Indo-Pacific strategy, which seeks to limit China's growing influence in the region, the US will also increase its engagement with the Maldives (and other small nations in South Asia). This is reflected in the Framework for a Defence and Security Relationship with the US, the country's first military agreement with any country other than India, which was signed in 2020. The US government has also announced its plan to open an embassy in the Maldives, but a timeline has yet to materialise. Notably, the Indian government has welcomed closer US-Maldives relations, in sharp contrast to its stance in 2013, when it blocked Mr Nasheed's plans to sign a Status of Forces Agreement with the US.

The tourism sector, along with the services ecosystem, is the main driver of the Maldivian economy. Reliance on tourism earnings left the county especially vulnerable to the covid-19 pandemic. The government's efforts in 2022-23 will remain focused on bolstering activity in the sector. This will involve marketing the country as a safe holiday destination, owing to its "one island, one resort" set up and widespread vaccination. The government will continue to offer a 30-day visa on arrival, with no mandatory quarantine upon presentation of a negative covid-19 test, and rely on rapid booster dose programmes to maintain immunity levels of resort employees and the local population. These initiatives are likely to be welcomed by tourists, the majority of whom are from high-income groups.

Other matters will be put on the back burner, putting any further reform measures under the Strategic Action Plan 2019-23 on hold. These include tackling corruption and human rights abuse that spread under the previous administration. Reforms to the judiciary to reduce its tendency of intervening in the country's political struggles will also be slow to materialise.

The current government inherited significant external debt associated with the infrastructure spending boom under Mr Yameen. The servicing of this debt, much of which is owed to China, will keep the country's budget balance in deficit. With the phasing-out of covid-19 relief on resort lease rent and with favourable tourism prospects boosting the collection of the goods and services tax, the deficit is forecast to narrow to 6.8% of GDP by 2023, from an estimated 14.4% of GDP in 2021. This is still slightly wider than the pre-pandemic average, as elevated global prices will increase the cost of the government's extensive subsidy programme, which covers utilities and food prices. We do not expect significant cuts in subsidies in 2022-23.

Grants and loans received by the Maldivian government from multilateral donors and other countries, especially India, will cover part of the fiscal shortfall in 2022-23. This will inflate the country's public debt levels but a strong economic recovery will temper the public debt/ GDP ratio, which the national authorities expect to fall to 104.5% of GDP in 2022, from 115.6% in 2020.

The primary job of the Maldives Monetary Authority (MMA, the central bank) is to maintain price stability, although legislation also tasks it with preserving an adequate level of international reserves. The MMA achieves monetary stability partly through the peg between the currency (the rufiyaa) and the US dollar. In view of this peg, the MMA has little scope to conduct independent monetary policy.

The MMA uses minimum reserve requirements (MRRs) for banks and open-market operations as instruments to control local credit creation and money supply. We expect the MRR on foreign-currency deposits to be raised back to 10% in 2022, from 5% currently, as steady tourism earnings reduce the risk of dollar illiquidity in the local currency market. The increase is likely to be delivered in two increments of 2.5 percentage points each over the year, matching the rise of MRR on local-currency deposits to 10% in 2021.

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Given the dominant role played by tourism in the Maldivian economy, real GDP growth in 2022-23 will be tied closely to the recovery of activity in the sector. The country's wide vaccination coverage, lenient visa procedures and natural separation of resorts from the main island inhabited by locals will underpin its popularity as a top tourist destination. The emergence of more contagious strains of the coronavirus, like Omicron, presents the main downside risk for the country's growth outlook, as this could prompt travel restrictions and disrupt the pace of economic recovery.

Nevertheless, higher global vaccine coverage, especially in the developed world, is expected to blunt the severity of future outbreaks and encourage more lax border restrictions globally in 2022 relative to 2021. This will increase tourism demand while also increasing competition from other tourist destinations. We expect the Maldives to clock in 1.5m tourist arrivals cumulatively over the year, up from 1.3m in 2021 but below 1.7m in 2019. The pace of recovery will slow in 2023, but we still expect real GDP to be 4% larger than 2019 level.

India will maintain its status as the leading source of tourism in the Maldives, while visitors from Europe (making up nearly half of the country's inbound tourism) are also expected to arrive in significant numbers. Outbound tourism from China-another traditionally important source of tourism-will only begin to recover in earnest in 2023, given our expectation that the Chinese authorities will continue adhering to a "zero-covid" policy through most of 2022, requiring lengthy quarantine for residents returning from overseas.

We do not expect a nationwide lockdown to be reimposed in the Maldives in 2022-23, allowing undisrupted work on ongoing infrastructure development projects. Tourism-affiliated services, such as transportation and retail trade, will also benefit from the anticipated return of visitors. Improving household earnings and continued support from the government, in the form of subsidies, will prop up private consumption.

Global prices dominate inflationary trends in the Maldives, as domestic consumption is driven mainly by tourism expenditure and is met mostly through imports. Inflation is therefore susceptible to global travel and price swings, and the pass-through is set by the rufiyaa:US dollar peg. However, the government's comprehensive policy of capping the cost of utilities (making up more than a fifth of the consumer price index) and other living expenses for citizens strongly blunts the pass-through of global price pressures.

Regulated prices and a sharp cut in internet prices offset the impact of rising food prices to keep overall consumer price growth soft in 2021, estimated to have averaged 0.7% during the year. Although the government is expected to maintain current subsidies in 2022-23, the introduction of a minimum monthly wage, set in the range of Rf4,500-7,000 (US$291-453) by the Ministry of Economic Development, and a proposal to tax plastic bags from mid-2022 will lead to higher cost-push inflation. Elevated fuel and transport costs globally will also be inflationary.

The rufiyaa is pegged to the US dollar. The mid-point of the exchange rate is Rf12.85:US$1, and the rate is permitted to fluctuate within a band of ±20%. In recent years the currency has consistently grazed the weak edge of the exchange-rate band.

Although we maintain an optimistic tourism outlook for the Maldives, the expiration of the debt relief offered by G20 countries in 2020-21 and the country's significant external debt burden will weigh on its external buffers, while anticipated monetary tightening by the Federal Reserve (US central bank) will increase refinancing costs. The Ministry of Finance has allocated around US$400m for debt obligations in its 2022 budget projections, which will be funded through credit assistance from bilateral and multilateral sources.

Although there is a significant risk that the government will be forced to weaken the currency if foreign-exchange reserves remain under pressure over a prolonged period, our core forecast is that the peg will be maintained as tourism receipts recover in 2022-23. However, the currency will continue to test the weaker edge of the band, especially as the outlook for the US dollar improves. The authorities will fully utilise the US$150m swap line with the Reserve Bank of India (India's central bank) to reduce pressure on the peg.

The value of merchandise imports dwarfs that of exports, and the country has historically run a wide deficit on its goods trade account. We expect the trade deficit to widen in 2022-23, inflated further by elevated global oil prices. The strengthening of external demand over the next two years and ongoing efforts to extend the country's shipments of fisheries (the main export commodity) to Russia and China will underpin a recovery in exports. This will, nonetheless, be overshadowed by resurgent tourism activity in the islands that will fuel the import bill, the size of which will continue to exceed exports by a wide margin.

By contrast, the Maldives' services exports from tourism (accounting for 90% of total services credits) have consistently exceeded services debits. These exports are expected to grow beyond their 2019 levels by end-2023, with the Maldives emerging as a leading destination for luxury tourism. However, the services surplus will be insufficient to offset the goods trade deficit.

The current account will remain in the red in 2022-23, but rising tourism receipts will result in a narrowing of the deficit to the equivalent of 20.2% of GDP by end-2023, from an estimated 24.6% of GDP in 2021. The primary and secondary income accounts will remain in deficit over the forecast period, reflecting high interest payments and negligible remittance inflows.

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