The Maldives is likely to remain politically stable in the one-year outlook given the smooth transition of power between former President Abdulla Yameen and President Ibrahim Mohamed Solih. Solih’s Maldivian Democratic Party (MDP) secured a surprise landslide victory in the parliamentary elections held on April 6, 2019. The result will grant Solih the mandate to undertake key economic reforms, including the renegotiation of Chinese investment contracts.
Opposition protesters routinely organised against Yameen, who has been accused of inflating Chinese investment contracts which involved personal gain for corrupt Maldivian officials.
In February 2018 thousands of protesters gathered to rally against Yameen, after he disobeyed the Supreme Court order to release nine political prisoners. Protests turned violent with police using batons and tear gas to disperse crowds in public areas.
The popular election of Solih, who has pledged to review Belt and Road Initiative (BRI) contracts agreed under the previous administration and tackle corruption, should reduce the likelihood of strikes, riots and civil commotion in the one-year outlook.
There will be a reduced risk of attacks on Maldives’ critical national infrastructure, including the desalination plants across its 87 tourist resort islands.
Maldives is the subject of a geopolitical power struggle between China and India for dominance of the Indian Ocean. However, this is unlikely to translate into interstate war.
Growing interest in the archipelago despite its population of just 436,000 reflects its strategic location.
With 1,200 islands, stretching over a latitudinal distance of 850km, Maldives claims an exclusive economic zone of 859,000 sq. km, in a section of the Indian Ocean that touches the main shipping route between China, the Middle East and Europe.
The MDP’s victory is likely to trigger a pivot to India at the expense of China in the near term outlook. The MDP has highlighted the risks associated with incurring significant Chinese debt.
According to the Maldives’ central bank, the government currently owes US$600 million to China, including US$374 million to fund an expansion of its international airport and US$68 million towards the construction of a 2km road bridge connecting the capital, Malé, with the international airport.
An additional US$935 million is owed in the form of sovereign guarantees on Chinese loans to companies. With annual revenues of US$1.5 billion as of 2018, the scale of Maldivian exposure to Chinese debt raises significant sovereign credit risks for investors.
Tourism underpins the Maldivian economy, accounting for 28% of GDP and more than 60% of Maldives’ foreign exchange receipts. Strong growth in both the tourism and construction sector will support to average economic growth of 4.1% in Maldives through to 2023 and improve the current account deficit.
However, the narrow economic base undermines the long-term growth outlook.
Maldives relies heavily on the desalination industry to secure access to safe drinking water. A fire at the Mal Water and Sewerage Company’s (MWSC) desalination plant in the capital city of Malé in 2014 caused a water crisis and highlighted the need for foreign expertise and investment.
In February 2019, a Japanese aqua-tech engineering firm won a US$ 8.8 million contract to develop a desalination plant on the artificial island of Hulhumale.
Contract revision risks have increased for investors following Solih’s election. The new administration has pledged to renegotiate debt repayments due to China for BRI investment projects.
Mohamed Nasheed, former president and key advisor to Solih, has warned against an outcome that would give China control over Maldivian territory.
This follows a worrying trend for investors, of newly elected governments in Bangladesh, Malaysia and Myanmar swiftly amending or cancelling BRI contracts arranged under previous administrations. Considerable upside risks exist for Indian firms intent on capitalising on the pivot away from China.
Maldives is not a member of the International Centre for the Settlement of Investment Disputes (ICSID). However, the government has respected the results of international arbitration in the recent past.
In 2017, a Singaporean court ordered the government of Maldives to pay US$271 million in damages to an Indian infrastructure firm, for the termination of a lucrative contract to develop and manage Maldives’ major airport.
5 Key Takeaways
- President Solih’s Maldivian Democratic Party (MDP) secured a surprise landslide victory in the parliamentary elections held on April 6, 2019
- The MDP’s victory is likely to trigger a pivot to India at the expense of China in the near term outlook
- Maldives in in receipt of approximate US$2.5 billion of Chinese loans, raising considerable sovereign credit risks for investors
- The Solih administration has pledged to renegotiate debt repayments due to China for BRI investment projects
- Strong growth in the tourism and construction sector will support overall economic growth of 4.1% in Maldives through to 2023.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Bolivia, Pakistan, Turkey and Ukraine all of which have been the subject of recent enquiries from our client base.