(Bloomberg) -- The president of the Maldives swept into power a year ago on a campaign to push India out of the island nation’s affairs and draw closer to China. Now, as a debt crisis looms and earlier Chinese loans come due, he is in New Delhi looking to mend some fences.
Mohamed Muizzu arrived in New Delhi on Sunday on a four-day state visit — his first since taking office — with the financial crisis one feature of discussions with Prime Minister Narendra Modi’s government. Prior to the trip, Muizzu has softened his rhetoric notably, saying he’s never opposed India and New Delhi knows the financial strain his nation is under and was willing to help.
That’s a contrast to a year ago when he won elections on an “India Out” campaign, pushing for the withdrawal of Indian troops from the Maldives and promising new big-ticket projects backed by China. His campaign thrust the Maldives to the center of the rivalry between the two powers, which have been vying for influence over the Indian Ocean nation known for pristine beaches and its strategic location straddling global shipping routes.
Both China and India have poured hundreds of millions of dollars worth of loans into the Maldives in recent years, saddling the tourism-dependent nation with debt amid a protracted economic slowdown, a drought of foreign reserves and a slow return of visitors.
The Maldives’ looming debt crisis and its economy are all high on the agenda for Muizzu’s visit, according to an Indian official familiar with the matter, who asked not to be identified as the discussions are private. The two sides will also review Indian projects in the Maldives and will seek a restart in tourism and a review of the introduction of India’s digital payments platform in the island nation, the person said.
During their meeting Monday, Modi and Muizzu discussed a potential free trade agreement, as well as ways for New Delhi to help the island nation develop infrastructure and military capacity, India’s External Affairs Ministry said. India has also extended two currency-swap agreements to the Maldives — one US-dollar agreement worth $400 million and one Indian-currency agreement worth 30 billion rupees ($357 million) — to shore up its access to foreign currency.
The currency agreements are aimed at bolstering confidence in the economy of the Maldives, Indian Foreign Secretary Vikram Misri told reporters in New Delhi. He said the two sides will continue to work on defense cooperation, adding that both countries handled the withdrawal of Indian troops with sensitivity.
The Maldives’ debt is estimated at 110% of gross domestic product, and risks are growing it may fail to make payments on its sukuk. If that were to happen, it would be the world’s first default of an Islamic bond.
India gave the Maldives a $50 million lifeline last month to help it avoid that outcome, but that was likely only a short-term fix given additional looming payments, according to investors and analysts.
Fitch Ratings estimates the country’s total external debt obligations will grow to $557 million in 2025, and exceed $1 billion by 2026. The island nation’s foreign reserves stood at just $437 million as of the end of August, sufficient to cover only around one-and-a-half months of imports.
A default event was looking more likely, according to Fitch, while the International Monetary Fund has also warned of a potential debt crisis.
“This is a growing concern and the debts are piling up,” said Aditya Gowdara Shivamurthy, an associate fellow at the Observer Research Foundation, a New Delhi-based think tank. “They’ve been able to repay until now. What will happen next is something we will have to see.”
China and India are the No. 1 and 2 external lenders for Maldivian central government debt, respectively. The Maldives owed about $400 million to the Export-Import Bank of India and about $530 million to the Export-Import Bank of China at the end of last year, according to official figures.
China has said it’s held discussions with Male over debt relief, while the People’s Bank of China recently signed an agreement to expand the use of local currencies between the two countries.
“President Muizzu has tried to steer the Maldives away from its traditional reliance on India to a more independent foreign policy, including friendlier relations with China,” said Søren Mørch, head of emerging markets debt at Danske Bank AS. “This recent bailout from India has shown the limits of this approach.”
Tourism Crunch
The debt crunch comes as the Maldivian economy has failed to maintain momentum in the wake of the Covid-19 pandemic. While GDP growth reached 13.9% in 2022, it slowed to 4% last year, with tourists spending at rates below pre-pandemic levels, according to the World Bank.
Relations between the Maldives and India took a dive in January after a social-media spat in which a Maldivian deputy minister mocked Modi — prompting a backlash from Indian citizens and several celebrities calling for a tourism boycott of the island.
In an interview with the BBC, Muizzu said the Maldives is not facing a sovereign debt default, nor would it join an IMF funding program. Still, India’s backing in any potential debt restructuring is likely to prove invaluable, making a fence-mending with New Delhi all the more important, said Gulbin Sultana, associate fellow at the Manohar Parrikar Institute for Defence Studies and Analyses, a government-backed think tank in New Delhi.
“Muizzu is re-balancing ties with India, as is New Delhi trying to reset its ties with the island nation,” she said.
(Updates with Indian foreign secretary comments in seventh paragraph.)
©2024 Bloomberg L.P.