For sun-loving tourists, the Maldives is a top destination for an amazing holiday experience. But for bond investors, the country’s growing political unrest is a reminder of the added investment risks that exist off the more-beaten track.
In June last year the Indian Ocean nation used the occasion of its 45-year friendship with Beijing to issue its first sovereign bond to help fund infrastructure projects. State-owned lender Bank of Communications was sole bookrunner on the deal.
The Reg S bond issue, which was increased to $250 million through a $50 million tap late last year, traded above water until February 1, when a court surprisingly ordered the release of jailed opposition members, including former dictator Maumoon Abdul Gayoom, who also happens to be the half-brother of current president Abdulla Yameen.
After the ruling, the single B-rated sovereign bond, which pays a chunky coupon of 7%, slumped from more than $100 to about $96 as spooked investors pulled money out.
To ease concerns among the Chinese, Maldivian economic development minister Mohamed Saeed flew to Beijing to meet his Chinese counterpart, Wang Yi, and reassert the Maldives government’s desire to protect Chinese interests in the tiny archipelago nation.
China’s diplomatic ties with the Maldives have been on the rise since President Xi Jinping’s state visit in 2014, the first by a Chinese president. The world’s second-biggest economy sees strategic value in assisting the Maldives under its Belt and Road Initiative, which aims to revitalise China’s historic maritime and land-based trading routes by investing massively to upgrade its infrastructure. The Maldives, in turn, hope to benefit from the harvest of Chinese largesse with a new hospital and an expanded international airport, amongst other things.
By some estimates Beijing accounts for more than half of the country’s total foreign loans, prompting criticisms from some quarters, including former president and UK-based political refugee Mohamed Nasheed, that China was effectively buying up the island country. Beijing has said such accusations are groundless.
To be sure, the growing closeness between Malé and Beijing has made New Delhi uneasy. There were media reports that China was looking to establish a base in the Maldives after leasing out one of the islands. Beijing and Malé have both denied this, but the incident highlights the potential for a local constitutional crisis on a tiny archipelago nation to morph into a full-blown regional crisis.
INTENSIFYING
The Maldives has suffered acute political instability for the past several years, but a new cycle of unrest appears to be intensifying in the wake of the court order to release Gayoom.
In a February 5 tweet, the exiled Nasheed requested the Indian government intervene and send a military force to end the political crisis and reassert its political influence in the Southeast Asia nation.
There is a precedent: in 1988 Indian troops successfully helped then-president Gayoom to repel an attempted coup by Sri Lankan mercenaries.
Yameen has since declared a 15-day state of emergency, giving security forces sweeping powers to arrest suspected opposition members, prohibit public gatherings, and impose travel restrictions. And on February 19, the government said it would look to extend the emergency by 30 days.
Yameen, who took power in a contested election in 2013, has also ordered the arrest of two Supreme Court judges and thrown another two police chiefs in prison, maintaining a strict surveillance of the country’s judiciary, police and bureaucracy.
In the wake of the growing political upheaval, tourists have been cancelling their travel bookings. The governments of China, India, the US, and UK have also issued travel warnings.
With tourism accounting for a third of GDP in 2017, the potential negative fallout for the $3.5 billion Maldivian economy is clear. Credit rating agency Moody’s has said it would lower its 2018 growth forecast of 4.5% if tourists were deterred for a prolonged period.
Previous political disruption has a negative effect on its economy. During a state of emergency in 2015, its GDP growth slowed to 2.8% from 6% the previous year, as the growth in tourist arrivals dropped to 2.4% from 7.1% over the same period.
“Heightened political tensions will reduce tourist arrivals, a key driver of the economy,” analysts at Moody’s wrote in a February 12 note. “This is the latest in a series of attempts to prevent an unseating of the current president, Abdulla Yameen Abdul Gayoom.”
The waters around the Maldives might be crystal clear and inviting but the country’s political waters are decidedly more turbid and unappealing and look set to stay that way for the foreseeable future.
