Some experts, including those quoted by Bloomberg, are even suggesting that the Maldives’ Sukuk might be at risk of becoming the country’s first bond to default, meaning the government might not be able to make the payments it promised to investors.
Phillipines Star
In recent months, the Maldives has been making headlines for two contrasting reasons: its reputation as a world-class tourist destination attracting millions of visitors, and its looming financial troubles, which have sparked concerns about the nation’s economic future. As the country grapples with a growing debt crisis, many are left wondering whether the Maldives will navigate these challenges successfully or if it risks following a path similar to that of its neighbour, Sri Lanka.
Just a few months ago, the Maldives was basking in global praise for its flourishing tourism industry. However, that success is now overshadowed by a growing financial crisis. In a recent blow to the country’s economic outlook, Fitch, a leading credit rating agency, downgraded the Maldives' rating from ‘CCC’ to ‘CC.’ This drop signals an even higher risk of default, casting doubt on the country's ability to repay its debts and sending ripples through financial markets.
One of the key concerns is a $500 million bond, known as a Sukuk, that the Maldives issued in 2021. This bond was meant to attract investors by offering a return of about 10 percent. However, the value of the bond has dropped by more than 70 percent, which is a significant decline. This drop means that investors are demanding a much higher return to compensate for the increased risk—so much so that the yield, or the return investors can expect by holding the bond until it matures, has risen to 33.5 percent. Such a steep increase in yield reflects growing investor anxiety, leading some to panic and offload their holdings to cut their losses.
In addition to the fear that this has caused among the investors, this is also bad news for the Maldives as the higher yield makes it much more expensive for the country to pay back what it owes. This not only impacts current debts but also complicates future borrowing, as the country will need to offer even higher returns to attract new investors—making debt financing more costly.
Some experts, including those quoted by Bloomberg, are even suggesting that the Maldives’ Sukuk might be at risk of becoming the country’s first bond to default, meaning the government might not be able to make the payments it promised to investors.
We sold the majority of our bonds in early summer, as we saw FX reserves were falling, since then things are clearly much, much worse. The big question is now whether the Muslim countries will ‘allow’ Maldives to default on a sukuk bond.
Although these fears are looming large with investors as well as citizens who are reading the international headlines on the country becoming the first bond to default, the Maldivian Government has continued to give reassurance that the bond will not default as the Government is capable of making its second coupon payment to investors, which is due on October 8th, 2024. Although the usable reserves of the Maldives stand at around USD 45 million with the Maldives owing around USD 25 million for Sukuk this October, the Maldives Monetary Authority is reported to state that the officials are working on arranging a USD 400 million foreign-currency swap with India’s Central Bank. This swap, if finalized, would significantly bolster the Maldives' financial position in time for the payment, easing concerns of an immediate default.
However, beyond managing immediate payments, experts argue that the roots of the crisis lie in the Maldives’ growing reliance on external borrowings to finance infrastructure projects, particularly those aimed at boosting tourism. Despite the country’s tourism sector being noted for its impressive performance, the heavy borrowings have stretched the country’s finances thin, making it vulnerable to global economic shocks and high-interest payments. One such notable project that has required extensive borrowings is the Maldives Airport development project, which has extended beyond its expected timeline - yet continues to remain a project that is still under development.
In addition to the major borrowings that each new administration continues to take up in order to facilitate infrastructure projects in the Maldives, the country has also been noted for its high dependence on imports, coupled with a limited export base which has contributed to the strain on foreign exchange. Although the Maldives has a notable tourism sector coupled with a sustainable fisheries sector, the country lacks in its export business while a majority of the goods available in the country are still heavily dependent on being imported from other countries. In an agriculturally rich country such as the Maldives, the dependency on exports reaches such a shocking level that even agricultural produce is largely imported, although locally produced goods are also freshly available in the markets.
This co-dependence on one single sector and how it can have a negative impact on the country became a stark reminder during the COVID-19 pandemic when the risks of relying too heavily on the tourism sector became evident. The Maldivian economy, which is renowned for its robust growth was left vulnerable when tourism was grounded to a halt during the pandemic. This also triggered a wave of borrowings to cover expenses, further pushing the country’s debt levels to new heights, and now, with global interest rates rising, servicing that debt continues to become increasingly difficult for the country.
Although much of the recent attention on the Maldives has focused on its financial struggles, including the Bank of Maldives' imposition of strict dollar limits, the government appears determined to address the crisis head-on. In addition to managing the upcoming Sukuk payment, efforts are underway to reform state-owned enterprises (SOEs) to improve efficiency and reduce financial strain. These SOE reforms are critical, as many of these government-owned companies have long been sources of financial drain due to inefficiencies, mismanagement, and political patronage. By streamlining operations and focusing on profitability, the government hopes to reduce the financial burden on the state and free up resources for more productive investments. In order to ensure SOE reforms, the Government of the Maldives has started taking extensive measures such as merging companies that serve similar purposes together - this includes the merging of the Fahi Dhiriulhun Corporation (FDC) into the Housing Development Corporation (HDC), and the merging of FENAKA Corporation with the State Electric Company Limited (STELCO). In addition to this, several entities, including the Maldives Integrated Tourism Development Corporation (MITDC) and AgroNet Maldives have also been dissolved, with the projects being run under these two organisations re-assigned.
The government is also exploring the introduction of an investor residency program aimed at attracting long-term foreign investment—a key step toward stabilizing the economy and securing a sustainable financial future.
