Moody’s has downgraded the Maldives’ credit rating.

The global credit rating agency lowered the island nation’s rating from CAA1 to CAA2.

In a statement issued on Wednesday, Moody's cited the reason for the downgrade owing to their assessment indicating an increased risk of default for the Maldives.

Based on Moody's assessment, they stated that foreign currency reserves have dropped, the level of assets in the Sovereign Development Fund is low, and the prospects for improvement have weakened.

Moody's observed that the debt ratio the Maldives needs to pay in the next 12 to 18 months appears significantly high and that the window to accumulate foreign currency for debt repayment is narrowing rapidly.

Although the government has been working to secure foreign funding, Moody's said it is still uncertain whether the government will receive enough funds to meet upcoming major debt obligations.

Further, the statement also sheds light on delays in implementing necessary financial reforms, as pressure on the national reserve increases.

Moody's says they will continue to review the current rating, as Maldives' already fragile foreign currency situation could further deteriorate if external financing is not secured in the short term.

The credit rating agency noted that the focus of the rating review will be on examining how the government can secure foreign financing to increase foreign currency reserves.

Additionally, Moody's has downgraded the Maldivian Rufiyaa ceiling from 'B2' to 'CAA1' and the foreign currency ceiling from 'B1' to 'B3'.

Moody’s has also noted that the significant difference between the local currency ceiling and the sovereign rating mirrors the low level of government involvement in key economic sectors, institutional weaknesses, lack of robust policies, and high dependence on imports.

The difference between the MVR ceiling and the foreign currency ceiling proves the challenges the Maldives faces in currency conversion during periods of foreign currency shortages, and particularly the difficulties in maintaining adequate foreign currency reserves to support the MVR’s value, according to Moody’s.

Shedding light on the island nation’s foreign currency adequacy, Moody's has stated that a decline in foreign currency reserves was observed over the past year.

As such, foreign currency reserves stood at USD 437 million by the end of August, which is noted to be equivalent to only one and a half months of import coverage.

Moody's has noted that even when including the estimated USD 65 million in the Sovereign Development Fund, the foreign currency reserves have decreased compared to a year ago. The agency highlighted that the important thing is that the reserves are significantly low compared to the USD 600 million – USD 700 million needed to repay the government's external debt in 2025 and over USD one billion that’s due in 2026.

The credit rater has predicted that the current account deficit will expand in the coming years and the financial situation will further decline.

Although food and energy prices have somewhat dropped, they are still relatively high, causing the import bill to continue rising.

Due to the increase in tourist arrivals, Moody’s noted that the demand for imports will increase even more.

As a result, the already fragile foreign currency reserves will further decline, and there will be challenges in attracting foreign investors to the Maldives, according to Moody’s.