The ongoing political turmoil in the country would hinder tourist arrivals, a key driver of the economy and a prolonged crisis would inhibit investment inflow, an analysis by Moody's warned Monday.
"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. Tourism accounts for one-third of economic output," the report said.
It also said the crisis would impede the running of fiscal policy, exacerbating both fiscal and external pressures.
The island nation has been embroiled in fresh political turmoil after the Supreme Court on February 1 ordered the immediate release of jailed political leaders including self-exiled former president Mohamed Nasheed.
President Abdulla Yameen Abdul Gayoom had declared a 15 day state of emergency after his last ditch attempt to convince the top court to revoke the order failed as the apex court rejected the government's 'legal and judicial' concerns over the order.
Several countries including India, US, UK and China have issued varying degrees of travel advisories to their citizens following the turmoil in the luxury tropical island destination.
"During a state of emergency in 2015, growth slowed to 2.8 per cent from 6 per cent the previous year, amid a slowdown in tourist arrivals growth to 2.4 per cent from 7.1 per cent the previous year. Previous political disruptions also have negatively affected GDP growth," the report further informed.
Since emergency state was declared police have made a series of high profile arrests including Gayoom, two lawmakers, chief justice Abdulla Saeed, top court judge Ali Hameed and the chief judicial administrator.
Less than a day after the arrest of the two judges, the remaining three judges rescinded its ruling to release the political leaders referring to the concerns raised by president Yameen in the letters he had sent to the chief justice hours before state of emergency was declared.
"This development is credit negative for the sovereign because it undermines the rule of law by overriding, for apparent political considerations, a decision by the judiciary," the report said.
The report said an immediate effect of political developments would 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.
"This is the latest in a series of attempts to prevent an unseating of the current president, Abdulla Yameen Abdul Gayoom. Similar events could become increasingly common with the coming presidential elections in September," the report said.
Moody's said apart from impeding budgetary operations and hindering the government's ability to meet its fiscal targets, a political crisis, especially if accompanied by human rights violations, risks disrupting funding from multilateral and bilateral lenders.
"Tighter financing of government debt would be particularly credit negative, given Maldives' sizable debt burden, which we estimate was 62.8 per cent of GDP in 2017. According to 2016 data, multilateral institutions held 9.8 per cent of public-sector debt, while bilateral lenders held 22.3 per cent. Smooth funding disbursement from these lenders is crucial for the financing of the government's large-scale infrastructure development program," the report said.
The report said escalating political tensions also will hinder Maldives' attractiveness as an investment destination.
"Net foreign direct investment, which , in 2017 totaled $484.5 million, or 10.4 per cent of GDP, plays an important role in financing Maldives' large current account deficit of 21.7 per cent of GDP in 2017. A substantial portion of this financing is likely directed toward the tourism industry and an unstable security environment risks reducing future inflows," it said.
Police on Sunday had claimed that new evidence had been uncovered in connection to the plot adding that a total eight people had been arrested thus far over the case.
In the statement, police had claimed to have uncovered document evidence implicating the suspects to the case revealing that over USD200,000 along with over MVR150,000 were found in a bag that belonged to judge Ali Hameed.
Police also said judge Ali Hameed had purchased a flat with the bribe money and an unnamed company had "loaned" over USD2 million to the judge.
The latest accusations came after police had confirmed Gayoom had bribed the judges into issuing the order in a bid to overthrow the government.
The accusations against Gayoom included bribing lawmakers and judges to influence their authority while the deposed ruling party leader has also been accused of creating discord within the security forces to back the overthrow of his half-brother's government.
The two top court judges are accused of accepting bribes to influence Supreme Court rulings, abuse of power and blocking the functioning of the entire justice system.
In addition to Nasheed, the other top political leaders named in the now rescinded order included Jumhoory Party (JP) leader Gasim Ibrahim, religiously conservative Adhaalath Party (AP) leader Sheikh Imran Abdulla, former defence minister Mohamed Nazim, former vice president Ahmed Adheeb Abdul Ghafoor and Gayoom's lawmaker son Faris Maumoon.
Former prosecutor general Muhthaz Muhsin, magistrate Ahmed Nihan and Adheeb's uncle Hamid Ismail make up the rest of the list.