Maldives bonds at record low after Fitch downgrade amid default concerns

By Shashwat Chauhan

Aug 30 (Reuters) - The bonds of the Maldives plunged to a record low on Friday following a second ratings downgrade since June and amid concerns over a potential default and escalating liquidity worries.

Fitch downgraded its rating on Thursday to 'CC', citing intensified pressures from the country's recently deteriorating external financing and liquidity metrics and stating that "a default event was more likely within the rating horizon".

A 'CC' rating indicates very high levels of credit risk.

The Maldives' 2026 Islamic Bond, or sukuk - its only listed international fixed income instrument - dropped to 67.88 cents in the dollar, having lost more than 15 cents since the Aug. 23 close, Tradeweb data showed.

Bonds trading below 70 cents in the dollar are widely considered as distressed.

The sharp tumble comes after the Bank of Maldives - the country's state-owned commercial bank - announced on Sunday that it would suspend or limit foreign transactions on cards linked to Maldivian rufiyaa accounts, flagging escalating usage of foreign currency spending.

The bank reversed the curbs within hours following instructions from the local regulator.

"Bond investors were alarmed by conflicting reports regarding foreign-currency restrictions, even as they worried about the country's fiscal deficit, debt and upcoming financing needs," said Hasnain Malik, a Dubai-based strategist at Tellimer.

The debt crunch comes amid political change for the archipelago. Maldives voters had handed President Mohamed Muizzu's party a landslide win in parliamentary elections in April, an outcome set to shift the Indian Ocean island nation closer to China and away from traditional partner India.

"The episode highlights that neither is the Muizzu-led government implementing much needed fiscal consolidation nor is it enjoying harmonious relations with all of its own business community," Malik said.

The Maldives, which has pegged its currency to the U.S. dollar and whose main source of foreign exchange revenue is tourism, has struggled to preserve its precious foreign currency reserves.

Reserves have nearly halved in the past 12 months and stood at $388.4 million in July, according to the Maldives Monetary Authority. That is less than one month of import cover, according to calculations from Tellimer, well below the three months generally seen as a safe buffer.

In response to the Fitch downgrade, the finance ministry said it remained committed to mitigating the risks highlighted by the ratings agency through fiscal consolidation and tapping bilateral and multilateral partners.

Fitch's downgrade is the second in three months. It downgraded Maldives' Long-Term Foreign-Currency Issuer Default Rating (IDR) to "CCC+" from "B-" in June.