Traders dump Maldives debt amid growing default risks

The Maldives, a popular tourist destination, is facing a severe financial crisis as investors rush to offload the country's Islamic bonds, known as sukuk. The selloff has intensified in recent weeks, with the dollar-denominated sukuk due in 2026 dropping below 70 cents on the dollar, a record low.

Further, the risk of default looms large as the Maldives grapples with deteriorating external financing and liquidity metrics. Recent moves by the Bank of Maldives to cap foreign currency spending, coupled with a second Fitch downgrade since June, have triggered a rush to dump the country's debt.

Looming debt crisis

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The Maldives has about $500 million in outstanding sukuk debt due in 2026, and all eyes will be on the October 8 coupon payment.Purvi Harlalka, a senior emerging-market sovereign debt strategist at M&G, noted in a Bloomberg report that "without a last-minute foreign exchange infusion from China, the Gulf Cooperation Council (GCC), or India, the non-payment of the October coupon is a plausible scenario.

"Despite gross reserves of $395 million in June, the country's usable reserves are just $45 million.The Maldives Monetary Authority is negotiating a $400 million currency swap with India, but Fitch's downgrade to CC underscores rising default concerns.

What are going tobe the implications for the economy?

The Maldives' economy, heavily reliant on tourism, has been recovering from the impact of the COVID-19 pandemic. However, the country remains dependent on imports and a dollar peg that continues to strain reserves.

Soeren Moerch, a portfolio manager at Danske Bank, said the bank sold most of its bonds in early summer as reserves fell. "Things are much worse now," he said, adding that the key question is whether Muslim nations will allow the Maldives to default on a sukuk bond?

Geopolitical tensions

The ruling People's National Congress, led by pro-China President Mohamed Muizzu, secured a parliamentary majority earlier this year, complicating the geopolitical landscape.The "India Out" campaign and lack of USD liquidity are red flags for some investors, like Maciej Woznica of Coeli Frontier Markets, who remain cautious about reinvesting in the country.

Hence, it is clear that Maldives faces a severe financial crisis as investors dump the country's Islamic bonds due to fears of default. The Maldives government must act quickly to address the deteriorating economic situation and secure foreign exchange infusions to avoid a potential default on its sukuk debt. Further, the governments also needs to think through a way to completely revive the economy along with maintaining healthy relations with neighbors.