How likely is Maldives to default on sukuk?

Tuesday, 22 October 2024 00:06 - - {{hitsCtrl.values.hits}}

Fitch Rating’s downgrade of the Maldives’ Foreign-Currency IDR to ‘CC’ at end-August indicates that a traditional payment default or distressed debt exchange has become more likely within the rating horizon.

“If this happens, it would be the first sovereign sukuk default. Sovereign sukuks are generally rated significantly higher than the $ 500 million sukuk issued by the Maldives in 2021, and set to mature in 2026,” Fitch said.

The downgrade followed a sharp decline in foreign-reserve buffers, plunging by 22% month-on-month to $ 395 million in July, the lowest level since December 2016. Gross reserves, net of short-term foreign liabilities, hit a record low of $ 44 million. Low reserves fell further to $ 371 million by September, reflecting persistently high current account deficits, high external debt service, and continued interventions to support the currency peg.

Liquidity constraints are evident from persistent US dollar shortages, exerting pressures on the parallel market. Spillover effects on the banking system have also become more prominent, with the banks’ US dollar liquidity tightening considerably.

An agreement reached on 7 October with the Reserve Bank of India on two currency swaps worth $ 400 million and INR 30 billion ($ 357 million), should provide some relief and allow for debt servicing on the sukuk in the near term. The Government has $ 50 million in sovereign external debt-servicing obligations due in 4Q24 and $ 64 million in publicly guaranteed external debt. However, total external debt servicing will rise to $ 557 million in 2025 and exceed $ 1.0 billion in 2026, including repayment of the sukuk.

Without radical policy measures, pressures are likely to persist over the medium term. The swaps will have to be repaid and do not resolve the underlying issues of high and rising public debt in combination with low foreign reserves and a hard peg to the US dollar. The Maldives Monetary Authority will likely continue to use part of the available dollars for interventions to support the peg. We also expect the current account deficit to remain large at 19.6% of GDP in 2024, partially driven by a fiscal deficit of 12.7% of GDP.

“We project the Maldives’ elevated general Government debt/GDP ratio (estimated at 109% at end-2023, excluding Government-guaranteed debt) will further increase over the medium term, well above the projected ‘B’/’C’/’D’ median level,” Fitch said.

“Support through an IMF arrangement, if needed, would most likely be contingent on debt restructuring. Therefore, avoiding default would likely depend on persistent and growing support from India or other bilateral partners. China has had low propensity to support, while we would not expect GCC countries to help the Maldives just to prevent a sovereign sukuk defaulting,” Fitch added.