Maldives Bonds Hit Record Low Amid Liquidity Fears and Political Shift

Maldives bonds reached an all-time low due to a recent ratings downgrade by Fitch and growing concerns over default and liquidity issues. The country's financial health in the wake of political changes and rising fiscal deficits has deteriorated, causing investors to worry about the future.

The bonds of the Maldives plummeted to a record low on Friday following a second ratings downgrade since June. Concerns over a potential default and escalating liquidity issues are driving the decline.

Fitch Ratings downgraded its assessment on Thursday to 'CC', citing increasing pressures from deteriorating external financing and liquidity metrics, indicating a higher likelihood of a default event in the near term. The 'CC' rating suggests very high levels of credit risk.

The Maldives' 2026 Islamic Bond, or sukuk, which is its only listed international fixed income instrument, dropped to 67.88 cents in the dollar. This is a significant drop, having lost more than 15 cents since August 23, according to Tradeweb data. Bonds trading below 70 cents in the dollar are generally considered distressed.

This sharp decline follows the Bank of Maldives' announcement on Sunday to suspend or limit foreign transactions on cards linked to Maldivian rufiyaa accounts, citing increased foreign currency spending. The restrictions were lifted within hours following regulatory instructions.

Investors were further alarmed by conflicting reports regarding foreign-currency restrictions, coupled with concerns over the country's fiscal deficit, debt, and upcoming financing requirements, said Hasnain Malik, a Dubai-based strategist at Tellimer. This debt crisis unfolds amid significant political changes. The Maldives recently saw President Mohamed Muizzu's party secure a landslide victory in parliamentary elections, marking a shift towards China and away from India.

This situation underscores that the Muizzu-led government is neither implementing necessary fiscal consolidation nor maintaining harmonious relations with its business community, added Malik. The Maldives, which pegs its currency to the U.S. dollar and relies heavily on tourism for foreign exchange revenue, has struggled to preserve its foreign currency reserves.

Foreign currency reserves have nearly halved in the past year, standing at $388.4 million in July, according to the Maldives Monetary Authority. This amount accounts for less than one month of imports, far below the generally accepted safe buffer of three months. In response to the Fitch downgrade, the finance ministry stated its commitment to mitigating the highlighted risks through fiscal consolidation and partnerships with bilateral and multilateral entities.

Notably, this is the second downgrade in three months by Fitch, which lowered Maldives' Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC+' from 'B-' in June.

(With inputs from agencies.)