India ready to offer Maldives emergency financial support as Sukuk default risk looms

India has reiterated its willingness to help as the Maldives hurtles toward the world’s first sukuk default. The emergency funding would help the Maldives meet its external debt payments due next month. The developments came even as the island nation pledged to meet debt obligations — helping its dollar-denominated sukuks recover from a record low.

According to a Bloomberg report quoting people in the know, Malé can immediately tap $400 million available under the Reserve Bank of India currency swap program. The country can also seek long-term loans under a $800 million line of credit extended to the government in 2019.

It was not immediately clear whether the Maldives had officially asked Indian authorities for help. However Maldives authorities said in a statement last month that officials were working to arrange a $400 million foreign-currency swap with India’s central bank and a green bond sale.

The matter is likely to be discussed during President Mohamed Muizzu’s upcoming visit to India.

Moody’s downgraded the nation into junk territory on Wednesday in light of default risks over eroding foreign reserves. Sukuk is a Sharia-compliant financial certificate that is used in much of the Islamic world. With double-digit losses this year, the debt is the worst performer on the Bloomberg EM Sovereign Total Return Index.

The Observer Research Foundation in Delhi found that the country’s debt stood at 110% of gross domestic product as of March 2024. Data compiled by Bloomberg indicates that the Maldives faces a $25 million payment on its roughly $500 million of outstanding sukuk debt in October.

A foreign-currency swap and other interim measures will however not fix the crisis — offering temporary relief and buying the island nation some time to find an actual remedy. Ties with India had become rather strained in 2023 as Muizzu came to power on an anti-India platform and promptly sought to improve ties with China.

(With inputs from agencies)