Traders flee Maldives amid escalating default risk as foreign currency crisis deepens: Report

The possibility of default is growing more likely. Recent measures by the Bank of Maldives to restrict foreign currency spending, along with a second downgrade by Fitch since June, have triggered a wave of selling, said the report.

With $500 million in sukuk debt due in 2026, all eyes are on the coupon payment scheduled for October 8.

Purvi Harlalka, senior emerging-market sovereign debt strategist at M&G, noted in a Bloomberg report, "Without a last-minute foreign exchange infusion from China, the GCC, or India, the non-payment of the October coupon is a plausible scenario."

Despite having gross reserves of $395 million in June, the Maldives' usable reserves stand at only $45 million.

Traders flee Maldives amid escalating default risk

The Maldives Monetary Authority is currently negotiating a $400 million currency swap deal with India, but Fitch's downgrade to CC highlights increasing fears of a potential default.

Soeren Moerch, a portfolio manager at Danske Bank, noted that the bank sold most of its bonds earlier this summer as the reserves began to decline.

"Things are much worse now," he was quoted as saying to Bloomberg, emphasizing that the main question is whether Muslim nations will permit the Maldives to default on a sukuk bond.

Despite increasing tourism revenues, the Maldives continues to rely heavily on imports and maintains a dollar peg, which puts additional pressure on its reserves.

The ruling People’s National Congress, under pro-China President Mohamed Muizzu, gained a parliamentary majority earlier this year, adding complexity to the geopolitical situation.

"The ‘India Out’ campaign and lack of USD liquidity are red flags. It’s too early for us to reinvest," Woznica was quoted as saying by Bloomberg.