Fitch Ratings has downgraded the Maldives' credit rating from 'CCC+' to 'CC', citing an increased risk of default due to deteriorating external finances, growing debt, and liquidity concerns. The global credit rating agency made the announcement on Thursday, signaling the country's worsening financial outlook.

Key factors driving the downgrade include falling gross foreign exchange reserves, escalating external debt service obligations, and vulnerabilities in public debt management. Uncertainty surrounding the government’s medium-term financing plan also contributed to the downgrade.

Fitch highlighted the Maldives' heightened risk of default as pressures from external financing and liquidity metrics intensify. The country’s foreign reserves plunged 20% from USD 492 million in May 2024 to USD 395 million in July 2024, the lowest level since 2016. Excluding short-term foreign liabilities, reserves hit a record low of just USD 44 million.

The Maldives faces USD 50 million in sovereign external debt servicing in Q4 2024, and a total external debt service of USD 557 million in 2025. By 2026, the figure is expected to surpass USD 1 billion, including the repayment of a USD 500 million sukuk.

Fitch noted that the Maldives’ current account deficits (CAD) remain persistently high due to public investment and reliance on imports, which continues to strain foreign reserves and tighten US dollar liquidity within the banking system.

While potential foreign exchange swap arrangements and fiscal reforms could alleviate pressure, Fitch warned of significant uncertainties surrounding these measures. The agency expressed doubt that the Maldives' large and rising public debt would be sustainable without fiscal consolidation, projecting that further international financial assistance may require debt restructuring.

The downgrade underscores the Maldives' growing fiscal vulnerabilities, as Fitch projects the government's debt-to-GDP ratio to exceed 109.4% by the end of 2023, with further increases anticipated over the medium term unless substantial progress is made in fiscal management and revenue mobilization.