Maldives debt falls after second Fitch downgrade

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Maldives bonds tumbled after Fitch Ratings downgraded the island nation’s debt for the second time in two months due to a deepening financial crisis in the tourist haven.

The South Asian archipelago’s sukuk, a debt compliant with Islamic religious law, fell to 71 cents on the dollar on Thursday as the ratings agency signaled “intensified pressures” on dwindling foreign reserves. The bond traded at more than 80 cents in early August.

The majority of the Maldives government’s $3.4 billion foreign debt is held by export-import banks in China and India, making the country’s mounting debt crisis a showcase for the rivalry between the two Asian powers.

In recent years, the Maldives has borrowed heavily from the two countries and private lenders to finance growing budget deficits, even as the coronavirus pandemic has hit tourism demand. Debt repayments now threaten to deplete reserves.

President Mohamed Muizzu, was elected last year on an “India Out” platform to reduce New Delhi’s military presence in the islands.

But now it has appealed to both India and China for bailouts. Government debt was 110% of GDP at the beginning of the year, including domestic borrowing.

“We see a growing degree of uncertainty around the government’s plan to tap the market and partially refinance the $500 million sukuk in 2025, in addition to near-term external liquidity strains,” Fitch said.

Fitch cut the country’s rating to CC, reflecting an increasing likelihood of default, following a downgrade to CCC+, or very high credit risk, in June.

The Maldives’ net foreign reserves fell below $50 million in July, while gross reserves fell below $400 million from about $500 million in May.

Despite a rise in tourist numbers this year to around 1.25 million in August, led by Chinese, Russian and British visitors, heavy reliance on imports and the Maldivian rufiyaa’s peg to the dollar have kept pressure on reserves.

Bank of Maldives, the country’s biggest lender, introduced foreign currency spending limits on local cards last week only to reverse them the same day “based on instructions from our regulator, the Maldives Monetary Authority”.

The Maldives Ministry of Finance said it was “committed to mitigating the risks highlighted by Fitch by implementing 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 the China ExIm Bank and that his government was in talks with India and China to secure currency swaps to ease the dollar shortfall.

These swaps could “relieve pressure on external funding, although it is uncertain whether they will materialize,” Fitch said. “Support from the IMF or other multilateral donors would most likely depend on debt restructuring,” he added.

The government invested tourism revenue in a “sovereign development fund” to ease debt, but Fitch said on Thursday it would face challenges using that resource to help repay the sukuk.

No government has ever accepted a sukuk, a debt market that has been used by countries such as South Africa, Britain and Turkey in recent years.