Maldives Seeks Urgent Bailout to Avert First Sovereign Sukuk Default

The Maldives is scrambling to secure a financial lifeline to avoid becoming the first nation to default on a sovereign sukuk, a key form of Islamic debt. The island nation faces a critical payment deadline in October, and with dwindling foreign reserves, the price of its $500 million sukuk has plummeted to about 70 cents on the dollar in recent weeks.

A potential default on the bond, which matures in 2026, would mark the first-ever sovereign default on sukuk debt, a market that saw $860 billion in issuances at the start of this year, according to Fitch Ratings.

“The pressing question on investors’ minds is whether the Maldives will be the first sovereign sukuk default,” said Joshua Loud, senior emerging markets portfolio manager at Danske Bank. “Since this has never happened before, the market doesn’t fully grasp the potential consequences.”

The Maldives, an archipelago known for its tourism but vulnerable to climate change, has struggled to manage its debt, having borrowed heavily from its two main bilateral creditors, India and China. With debt repayments now draining its foreign reserves, concerns are mounting that neither of its powerful neighbors will step in to prevent a complex default and restructuring process.

Sukuk bonds, compliant with Islamic law, avoid traditional interest payments and instead offer investors a share of profits generated by an underlying asset. While these bonds have been issued by nations such as the UK, Malaysia, and Nigeria, they are more commonly associated with wealthy Gulf states. Despite strong global demand for sukuk—S&P Global expects $170 billion in issuances this year, with Moody’s forecasting over $200 billion—the Maldives’ financial troubles pose a risk to the broader market’s stability.

Though tourism has rebounded post-pandemic, the Maldives remains heavily dependent on imports, and rising global inflation coupled with significant spending on infrastructure projects has inflated its debt levels. Foreign exchange reserves have dropped to critically low levels, with net reserves falling below $50 million in July, down from $500 million in May. The Maldives’ gross reserves now stand at under $400 million.

“The country’s reserves have reached a critical low,” said George Xu, a director at Fitch Ratings in Hong Kong, who noted the increasing likelihood of a default. Fitch has downgraded the Maldives’ debt twice in the past two months, further alarming investors.

The Maldives' finance minister, Mohamed Shafeeq, expressed optimism last week, stating that the government could still meet the $25 million sukuk payment due in October. However, with its reserves depleted, the country is exploring alternative financial strategies, including green bonds and potential currency swap agreements, to stabilize its currency and shore up reserves.

While large international asset managers, including BlackRock and Franklin Templeton, hold portions of the Maldivian sukuk, other key holders, such as Dubai’s Emirates NBD bank, are closely monitoring the situation.

A spokesperson for the Maldivian president’s office emphasized the government’s efforts to bolster foreign currency reserves and engage with bilateral and multilateral partners to meet both short- and medium-term financing needs. Nevertheless, experts warn that a sukuk default would be uncharted territory, potentially challenging legal frameworks for sovereign debt restructuring.

Although sukuk are typically backed by assets—such as a $140 million hospital in the Maldives used as collateral—investors may find it difficult to seize or liquidate these assets in the event of a default. According to Alvarez & Marsal, a consulting firm, sovereign sukuk restructuring remains a complex and poorly understood area of law.

Some analysts have speculated that the Maldives’ strategic partners—India, China, or the Gulf Cooperation Council (GCC)—might intervene to prevent a default, given the potential repercussions for the broader sukuk market.

“Countries like Egypt have benefited from the clean record of sovereign sukuk, enabling them to secure better rates. No one wants to see that reputation tarnished,” said Loud. Gulf nations, which are significant issuers of sukuk, have previously stepped in to preserve market confidence, as seen in Bahrain’s 2018 bailout by its GCC neighbors. Despite the Maldives’ growing debt burden, Fitch’s Xu believes the country may still secure external financing from its strategic partners. “Total external debt service will climb to $557 million by 2025 and surpass $1 billion by 2026. This is an enormous burden for the Maldives’ economy, but its relationships with India, China, and the GCC offer some hope for continued external financial support.”