Investors are increasingly offloading Islamic bonds from the Maldives amid rising fears that the nation could default on its debt, according to a report by Bloomberg. The value of the sukuk bonds, which are due in 2026, has plummeted to a record low, with the bonds trading at less than 70 cents on the dollar this week. This marks a significant decline from their June value of approximately 93 cents, making the bonds the worst performers on Bloomberg’s Emerging Markets Sovereign Total Return Index.
The selloff has been exacerbated by recent measures taken by the Bank of Maldives (BML), which introduced new limits on foreign currency spending, further fuelling concerns among bondholders. Additionally, Fitch Ratings downgraded the Maldives’ credit rating for the second time since June, citing an increased risk of default.
The Maldives, which has $500 million in outstanding sukuk debt, faces a critical coupon payment due on 8 October. According to analysts, the country’s gross foreign reserves have dwindled to $395 million as of June, with usable reserves standing at just $45 million. The Maldives Monetary Authority (MMA) is reportedly working on securing a $400 million foreign-currency swap with India’s central bank in a bid to bolster reserves.
Despite a rise in tourism revenues this year, the Maldives’ heavy reliance on imports and its currency peg to the US dollar have severely impacted its foreign exchange reserves. Fitch’s latest downgrade of the country to CC status underscores the heightened risk of a default event, which the agency warns could occur within the rating horizon.
The political landscape in the Maldives has also contributed to investor unease. The ruling People’s National Congress party’s parliamentary victory in April has strengthened President Dr Mohamed Muizzu’s pro-China stance. However, his administration’s “India Out” campaign has raised concerns among investors, particularly regarding the country’s future relations with key international partners like India.
As the October payment deadline approaches, the likelihood of a default remains a pressing concern, with investors watching closely to see whether an eleventh-hour financial intervention from allies such as China, India, or Gulf Cooperation Council (GCC) countries can avert a potential crisis.
