(Bloomberg) -- A selloff in Islamic bonds from the Maldives has intensified in recent weeks as investors rush to dump the island nation’s debt on fears of default.
The dollar-denominated sukuk bonds due 2026 dropped below 70 cents on the dollar this week, a record low. With double-digit losses this month, the debt is the worst performer on the Bloomberg EM Sovereign Total Return Index. The notes traded at 69.5 cents on Wednesday, down from about 93 cents in June.
“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,” said Soeren Moerch, a portfolio manager at Danske Bank. “The big question is now whether the Muslim countries will ‘allow’ Maldives to default on a sukuk bond.” No government has ever defaulted on that type of debt.
The notes came under renewed pressure over the past two weeks after Bank of Maldives, the archipelago’s biggest commercial bank, introduced new limits on spending in foreign currency for its customers. Fitch Ratings also downgraded the country’s standing for the second time since June, citing increased default risk. Those decisions spooked many bondholders.
The Maldives has about $500 million in outstanding sukuk debt due in 2026, according to data compiled by Bloomberg, and now all eyes will be on the next coupon payment date on Oct. 8.
“The default risk in the Maldives sukuks has increased as the country has large external payments coming due and not enough FX reserves to service them,” said Purvi Harlalka, a senior emerging-market sovereign debt strategist at M&G. “Barring an eleventh-hour infusion of foreign exchange from a friendly overseas government such as China, GCC or India, the non-payment of the October coupon is a plausible possibility.”
Gross foreign reserves declined to $395 million as of June 24, from about $700 million a year ago, according to official data. Usable reserves, however, stood at just $45 million, according to the Maldives Monetary Authority. The authority said in a statement on Friday that the officials are working on arranging a $400 million foreign-currency swap with India’s central bank.
Despite an increase in tourism revenues this year, heavy dependence on imports for basic products and a currency peg against the dollar have been eroding reserves. Fitch on Aug. 29 downgraded the Maldives to CC, saying that “intensified pressures from the country’s recently deteriorating external financing and liquidity metrics have made a default event more likely within the rating horizon.”
The country’s ruling People’s National Congress party won an absolute majority in parliament in elections held April, giving President Mohamed Muizzu’s pro-China policies a boost. Muizzu won the presidential vote last year on a campaign to reduce India’s presence in the country.
For some investors, that was a sign to stay away.
“Following the ‘India Out’ campaigning, it was a red flag to see Maldives looking to get concessions from India,” said Maciej Woznica, a fixed income portfolio manager at Coeli Frontier Markets. “Reports of no USD liquidity triggered the current selloff. Fascinating situation to follow with China, India and Middle East involved, but it’s too early for us to get back involved.”
(Updates with latest market figures in second paragraph)
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