Maldives Debt Morass Implicates Islamic Finance

As we previewed several weeks ago in a post on Sri Lanka's proposed sovereign exchange after two years in default, the tourist haven Maldives islands are the latest in South Asia dominoes to teeter on default with a twist. This time, a 2026 $600 million Islamic sukuk bond could go to the wall where the global $850 billion local and external market has not been tested by official collapse as in routine conventional episodes. We were extensively schooled on sharia-compliant structures as the phenomenon took off, especially in Malaysia decades ago, where it is half of government and corporate issuance. They are based on underlying assets as collateral, in the Maldives' case, segregated in a special purpose Cayman Islands vehicle difficult for creditors to access directly. More importantly, equity-like risk sharing is a core tenet so that prominent non-Western holders like the UAE's Emirates NBD Bank can expect to absorb major losses in a credit event. Dubai itself got into trouble under standard borrowing during the global financial crisis fifteen years ago and was rescued by Abu Dhabi, while Bahrain was also bailed out to the tune of several billion dollars by Saudi Arabia in the closest precedents to date. Corporate sukuk, on the other hand, have encountered busts and even nasty litigation in commercial courts with suspected fraud, with religious scholars on call to weigh in on resolution validity.

The bond price hovers at the distressed 70 range with a 40% yield and is off 20% in the past month as domestic banks have dumped it with already high government securities exposure at 30% of assets. The Finance Minister vows to make a $25 million coupon payment with gross FX reserves of around $500 million and liquid ones of $50 million, equal to less than one-month external payment needs. A year ago, the instrument was already on the ultra-high yield frontier fringe at 80 and 20% yield, heading into elections with government debt to GDP at 110%. The former Malé mayor Mohamed Muizzu and his People's National Congress party won 55% of the vote and a three-quarters parliament majority on a brazenly anti-India, pro-China platform as the two have geopolitically vied for supremacy with aid and loans. The US is a latecomer to the mix, with the Agency for International Development opening a mission just the past year, while the islands have been otherwise singled out by Washington for acting as a sanctions-skirting high-tech chips conduit for Russia's war.

India's flagship infrastructure project was $500 million for a cross-island road, met with China's $1 billion counter for a bridge. President Muizzu turned to Beijing as preferred partner despite its $400 million trade surplus and ordered Indian troops based there for extra security under longstanding relations to prepare their exit. Immediately on taking office he and his cabinet got into a tourist resort promotion clash with Indian Prime Minister Narendra Modi and his colleagues, which resulted in expulsion of several diplomats. Indians, by common culture, currency peg, and proximity, have traditionally been the leading visitor contingent, but the sharp exchange brought an outright headline boycott this year for 30% of GDP industry. Europe, China, and Russia arrivals have filled the breach, with earnings up 25% in Q1. We can personally attest to a UK honeymoon couple who found it a good-value destination despite evidence that pristine beaches and marine life are under enormous strain from non-stop development.

Rating agencies preoccupied with Pakistan and Sri Lanka did not really highlight the Maldives' debt travails until mid-year, with Fitch particularly aggressive on dual downgrades from B to CCC and then to CC with outlooks not applying in this near default tier. External servicing for sovereign and guaranteed obligations is $400 million this year, rising to $550 million in 2025 and $1 billion in 2026 with sukuk redemption. A government fund has set aside an account for repaying the USD bond with only $50 million on hand. The fiscal and current account deficits are both in double digits at 15% and 20%, respectively, while government-guaranteed debt for state companies is 15% of GDP contingent liability. With a new airport terminal to open in Q4, visitor numbers are on track to surpass a record two million, driving 5% growth but still not fast enough to keep pace with cascading local and foreign bond loads.

A default may usher in an immediate health crisis, as the $150 million largest public hospital has apparently been pledged as the underlying asset creditors could in theory attach to recover value. The nominally independent Maldives Monetary Authority, in a bid to pre-empt this outcome, has defied the prevailing anti-India stance and solicited a $400 million swap line through the South Asia Payments Union, which Colombo tapped over its crisis. New Delhi dominates the body with its outsize, almost $700 billion in foreign exchange reserves. However, short-term help will likely be a poisoned chalice as it is unlikely to improve acrimonious bilateral sentiment or set a path for future responsible borrowing without intrusive oversight. The IMF has assigned a high-risk debt distress classification and also warns of compounding from climate change, but the government has eschewed a program. India for its part, has its hands full with a parallel implosion in Bangladesh after its ally ex-Prime Minister Hasina fled, leaving the Adani Group as one example with $300 million in unpaid bills. If it demurs, China and the GCC may be ready to step in for another round of non-Paris Club guides to subcontinent salvation.

All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.