On 2 September 2021, the Government of Maldives issued another USD200 million Sukuk, or Islamic bond, in addition to the USD300 million issued in March (USD200 million) and April (USD100 million), taking the total Sukuk issued to USD500 million in 2021. Similar to the ‘tap issue’ in April 2021, the current Sukuk is reported to have been issued at 10.5 percent and is due in 2026. This is higher than the initial Sukuk issued in March 2021, reported to be priced at 9.875 percent and currently trading at 9.56 percent after decreasing to 8.85 percent on 13 August 2021.
According to the Ministry of Finance (MOF), the issue was oversubscribed three times over, with investors from pension funds, banks, hedge funds and asset managers from America, Europe, Nordic countries, Asia and the Middle East. It also noted that the Sukuk will pave the way for inclusion in the Emerging Market Bond Index. However, it is not surprising that the Sukuk registered such high demand, since it was a tap issue with a rate fixed at a very high price of 10.5 percent, compared to similar issues from other rated countries in the region. For instance, Sri Lanka issued a bond with a similar maturity in 2019 at 6.35 percent, while Pakistan had a 30-year issuance in 2021 at 8.875 percent.
Like the previous Sukuk issuance, the joint lead managers and book runners for this Sukuk were the Islamic Corporation for the Development of the Private Sector (ICD), Emirates NBD Capital, Credit Suisse, HSBC, J.P Morgan and Standard Charted Bank. The proceeds of the previous issuance were used partly to settle the first Sovereign Bond of USD250 that was issued in 2017 at 7 percent and maturing in 2022. However, it is not clear how the proceeds of funds of this USD200 million Sukuk will be used. It is most likely to be used to finance the budget deficit, which is now forecasted to increase to above 18 percent of GDP in 2021, since only 8 percent of the MVR3 billion new revenue measures budgeted is now estimated will be realised.
Based on the medium term fiscal strategy, the financing gap is now projected to increase from MVR14 billion (USD929 million) to MVR17 billion (USD1,092 million). This was largely due to an increase in domestic financing which is projected to increase from MVR3.8 billion to MVR6.6 billion, since the government delayed the repayment of over MVR4 billion borrowed funds from the MMA in 2020, through extending the suspension of the Fiscal Responsibility Act. In June 2021, the total borrowed funds from MMA was at MVR3.5 billion while the total domestic borrowing stood at MVR48 billion compared to MVR45 billion at the end of last year.
With this additional Sukuk issuance, total debt (public and public guaranteed) is now projected to increase from MVR86 billion at the end of March 2021 to over MVR94 billion or 140 percent of GDP in 2021. Of this, external debt, projected to account for 48 percent, is now projected to increase from MVR41.9 billion to MVR45 billion or USD2.9 billion at the end of 2021
This increase in debt distress is one of the reasons why Moody’s downgraded its sovereign rating for the Maldives in August 2021 from B3 to Caa1. Similarly, in November 2020, Fitch had also downgraded the Maldives’ rating to CCC, noting at the time that the country was under external liquidity pressure. Moody’s also downgraded its rating for Maldives Sukuk Issuance Limited, the special purpose vehicle that is wholly-owned by the Ministry of Finance and which was used to issue this recent Sukuk.
The downgrade by Moody’s was largely on account of deteriorating fiscal strength, stemming from the significant increase in the debt burden due to the COVID-19 pandemic, which has increased from 78 percent of GDP in 2019 to 149 percent of GDP in 2020. In addition, it also highlighted the risk of a further increase in fiscal deficits, as well as the risk of higher interest costs and commercial borrowing. This is evident from the high borrowing cost of the current issue.
Another issue that is of great concern is what these borrowed funds will be used for — that they are being utilised for projects that may not contribute to medium-term growth. Data published by the MOF on 18 August showed that while total budget expenditure was recorded at MVR17 billion, only MVR3.9 billion or 22 percent was spent on capital expenditure. The 2021 budget, formulated in the middle of the pandemic which by extension should mean that the impact on the economy and financing should have been accounted for, budgeted 38 percent of expenditure on capital projects. So where is all this additional financing going towards — we may be in fact borrowing to sustain recurrent expenditure, and at high cost.
The projections included in the article are projections by this publication based on numbers published by the Ministry of Finance and reports of new debt availed by the government.