BEIJING/LONDON —The Maldives’ hopes of staving off a debt crisis were given a lift on Friday after China agreed to strengthen trade and investment in its latest demonstration of support and influence in the Indian Ocean nation.
Concerns have grown in recent months that the cash-strapped Maldives could become the first country to default on Islamic sovereign debt but this week has seen a sudden improvement in sentiment.
A sharp rebound in its only international market bond – a sharia-compliant sukuk issue – was capped on Friday as China’s central bank, the People’s Bank of China (PBOC) and the Maldivian Ministry of Economic Development and Trade announced a “memorandum of understanding”.
Though the details were limited, the two sides said it was “a framework for cooperation” aimed at “promoting the settlement of current account transactions and direct investments in local currencies,” as well as facilitating smoother trade.
The signing of the MoU is the latest example of the Maldives reorientation towards China and away from India, traditionally the archipelago nation’s closest regional economic and security partner.
In April, Maldives voters handed President Mohamed Muizzu’s party a landslide win in a parliamentary election. Muizzu, who took over as president in November, then held talks with China’s President Xi Jinping in Beijing in January.
China’s foreign ministry earlier in the day had said the world’s second-largest economy and biggest bilateral lender had been in touch with the Maldives about its debt to Beijing and stepping up financial cooperation between the two countries.
“China will, as always, provide support and assistance to the economic and social development of the Maldives within its capability,” Mao Ning, a Chinese foreign ministry spokesperson, told a regular press conference in Beijing prior to the announcement.
It saw the Maldives’ sovereign sukuk bond extend its swift rebound. It added a hefty 4.2 cents on the day to reach almost 79 cents on the dollar, having started the month at a record low of 68 cents.
Warnings
Analysts warn it is not out of the woods yet though.
Moody’s this week became the latest rating agency to warn a default was looking increasingly likely, highlighting that the country’s reserves remain “significantly below” the $600 million to $700 million worth of debt payments the Maldives has coming due next year and the more than a billion dollars it has to make in 2026.
The country’s central bank responded by vowing it would not default and that the country would make a $25 million payment on its Islamic sovereign debt next month on time and in full.
Much of the money the Maldives owes is to regional rivals China and India though, which have extended $1.37 billion and $124 million in loans, respectively, World Bank Data shows.
Tina Vandersteel, head of GMO’s Emerging Country Debt team, an investment fund with a specialism in distressed debt, said exactly how much the Maldives owes remained “murky” while its U.S. dollar-pegged rufiyaa currency was a potential problem too.
“If the peg goes and then you have the typical 30% depreciation, debt-to-GDP – which is already 120% – would go even higher,” she said.
