Maldives faces Sukuk bond crisis, traders panic over potential default

Bloomberg has reported that in the past three weeks, there has been a significant rise in the number of investors rushing to sell off their Maldivian Sukuk bonds, driven by growing fear that the Maldives may default on its debt.

Highlighting that a selloff in Islamic bonds from the island nation has increased significantly over recent weeks as investors rush to “dump” the Maldives’ debt on fears of default, Bloomberg reported that the price of Maldivian Sukuk bonds, more commonly known as Islamic bonds which are primarily traded in U.S. dollars, dropped below 70 cents per dollar, in the previous week.

Further, the news outlet reported that this is a record low price.

According to Bloomberg, the Maldivian Sukuk has emerged as the poorest performer in the "Bloomberg EM Sovereign Total Return Index" this month, given the significant decline in its bond price. Danske Bank’s portfolio manager, Søren Mørch, disclosed that the bank has offloaded most of its holdings in these bonds in response to the severe drop in the Maldives' foreign currency reserves and worsening conditions.

Bloomberg noted that the question now arises whether other Muslim countries will allow the Maldives' sukuk to default and that no country has defaulted on Islamic bonds, to date.

Pressure on the Sukuk bond increased in the previous week in the wake of Maldives' largest commercial bank, Bank of Maldives (BML) announcing the introduction of additional limits on dollar transactions to its customers.

Fitch Ratings consecutively lowered the Maldives' rating as well, marking the second time Maldives' credit rating has been downgraded, since June.

Noting that Maldives has a high risk of debt distress, Bloomberg said that this has resulted in panic amid bond investors.

The news outlet stated that Maldives requires to repay USD 500 million in Sukuk bond debt by 2026 and that everyone’s attention right now is focused on the payment due to investors on October 8.

M&G’s Senior Emerging Market Sovereign Debt Strategist Parviz Haralalka revealed that the risk of default on the Islamic bonds issued by the Maldives has increased due to the high amount of external debt payments and the lack of sufficient foreign currency reserves to make those payments.

Haralalka further stressed that it is possible that the October coupon payment may go unpaid unless a friendly foreign country like China, Gulf nations or Maldives’ closest neighbor India provides foreign currency assistance at the last minute.

Bloomberg stated that despite an increase in tourism revenue, heavy reliance on imports for basic necessities and maintaining the value of Maldivian Rufiyaa against the U.S. dollar have put pressure on foreign currency reserves, and that on August 29, Fitch downgraded Maldives credit rating to ‘CC’ from ‘CCC+’ citing the risk of default due to low foreign currency reserves.

The news outlet also reported that incumbent president Dr. Mohamed Muizzu’s ‘India Out!’ slogan during the presidential elections leading up to his victory, raised concerns regarding the further souring of relations between Maldives and India.

When the now ruling People’s National Congress (PNC) won a massive majority in the parliamentary elections later on, some investors became wary of the Maldives.