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Maldives declaring emergency is credit negative for the sovereign as it undermines the rule of law and will reduce tourist arrivals, Moody's Investors Service said today, warning of a prolonged crisis affecting investments. The Maldives government last Monday declared a 15-day state of emergency, which will prevent the release of nine imprisoned opposition figures. This is the latest in a series of attempts to prevent the unseating of President Abdulla Yameen Abdul Gayoom. "Similar events could become increasingly common with the coming presidential elections in September," Moody's said in a statement. The declaration of emergency "is credit negative for the sovereign because it undermines the rule of law by overriding for apparent political considerations a decision by the judiciary", it said. Heightened political tensions will reduce tourist arrivals, a key driver of the economy, it said. "A prolonged crisis will reduce investment inflows and impede the running of fiscal policy, exacerbating both fiscal and external pressures." Since the first multiparty elections in 2008, Maldives has witnessed frequent incidences of violence, alleged coup attempts and a high degree of polarisation. "The most recent incident followed a Supreme Court ruling that revoked terrorism charges against opposition members, including exiled former president Mohammed Nasheed, and called for their release," Moody's said. The state of emergency thwarts this ruling, which was reversed a day after the state of emergency declaration. Moody's said an immediate effect of political developments will be on tourist arrivals. "Some countries, notably India, China, Singapore and the UK, already have issued travel advisories recommending avoidance of all but essential travel to Maldives. The US since January has had Maldives on a Level 2 travel advisory, which recommends that tourists exercise caution owing to terrorism risks," it said. In 2017, tourist arrivals increased 8 per cent.
More than 44 per cent of total tourist arrivals in 2017 were from Asia, with Chinese tourists accounting for 22 per cent of the total. "If tourists are deterred from travelling to Maldives for a prolonged period, the crisis will reduce growth and prompt us to revise down our current forecasts of 4.5 per cent real GDP growth in 2018," Moody's said. Tourism accounts for one-third of economic output. During a state of emergency in 2015, growth slowed to 2.8 per cent from 6 per cent in the previous year, amid a slowdown in tourist arrivals growth to 2.4 per cent from 7.1 per cent the previous year. Besides economic cost, a political crisis if accompanied by human rights violations risks disrupting funding from multilateral and bilateral lenders, Moody's said adding tighter financing of government debt would be particularly credit negative. Maldives' debt burden is estimated at 62.8 per cent of GDP in 2017. "Escalating political tensions also will hinder Maldives' attractiveness as an investment destination," it said adding net foreign direct investment plays an important role in financing Maldives' large current account deficit of 21.7 per cent of GDP in 2017. FDI in 2017 totalled USD 484.5 million, or 10.4 per cent of GDP. Moody's said a substantial portion of this financing is likely directed toward the tourism industry and "an unstable security environment risks reducing future inflows".
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