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The bonds of the Maldives slumped after Fitch Ratings downgraded the island nation’s debt for the second time in two months over a deepening financial crisis in the tourist paradise.
The south Asian archipelago’s sukuk, a debt compliant with Islamic religious law, fell to 71 cents on the dollar on Thursday as the rating agency flagged “intensified pressures” over its plummeting currency reserves. The bond traded at more than 80 cents at the start of August.
The majority of the Maldivian government’s $3.4bn external debt is held by the export-import banks of China and India, making the country’s mounting debt crisis a showcase for rivalry between the two Asian powers.
The Maldives borrowed heavily from the two countries and private creditors in recent years to finance growing budget deficits, even as the coronavirus pandemic hit demand for tourism. Debt repayments now threaten to drain reserves.
President Mohamed Muizzu, was elected last year on an “India Out” platform to reduce New Delhi’s military presence in the islands.
But he has now appealed to both India and China for bailouts. State debt was 110 per cent of GDP at the start of the year when including domestic borrowings.
“We see a rising degree of uncertainty surrounding the government’s plan to access the market and partly refinance the $500mn sukuk in 2025, in addition to near-term external liquidity strains,” Fitch said.
Fitch cut the country’s rating to CC, reflecting a rising probability of default, following a downgrade to CCC+ or very high credit risk, in June.
The Maldives’ net foreign exchange reserves fell below $50mn in July, while gross reserves dropped under $400mn, down from about $500mn in May.
Despite a surge in tourists this year to about 1.25mn as of August, led by Chinese, Russian, and UK visitors, heavy dependence on imports and the Maldivian rufiyaa’s peg against the dollar have kept up the pressure on reserves.
Bank of Maldives, the country’s largest lender, introduced limits on foreign currency spending on local cards last week only to reverse them the same day “based on instruction from our regulator, the Maldives Monetary Authority.”
The Maldives finance ministry said that it was “committed to mitigating the risks highlighted by Fitch through the implementation of comprehensive fiscal consolidation measures and securing medium-term financing requirements with the support of our bilateral and multilateral partners.”
Muizzu said in July that China had given the “green signal” to defer five years of loan payments to China ExIm Bank, and that his government was talking to India and China to secure currency swaps to alleviate dollar shortages.
These swaps could “ease the external financing pressure, although it is uncertain whether these will materialise,” Fitch said. “Support from IMF or other multilateral donors would most likely be contingent on debt restructuring,” it added.
The government has been ploughing tourism revenues into a “sovereign development fund” to alleviate debt, but Fitch said on Thursday that it will face challenges using this resource to help repay the sukuk.
No government has ever defaulted on a sukuk, a debt market that has been tapped by countries including South Africa, the UK, and Turkey in recent years.
