Maldives: Sovereign Guarantees And Bonds For Foreign Investments – Analysis

By N. Sathiya Moorthy

n a move purportedly aimed at facilitating and promoting industry and development, the Government of President Abdulla Yameen has offered ‘sovereign guarantees’ for public and private entities seeking foreign investments in select areas. In a separate move, also aimed at development-budgeting, the Government has decided to float bonds worth $ 200 m in the international market in the New Year, as against cheaper loans and Treasury bills, the latter exclusively targeting the local purchasers.

The web journal, Maldives Independent, quoted new Finance Ministry regulations to say that “sovereign guarantees will only be issued for loans taken with an interest rate below four percent to finance tourism-related projects, social housing projects that meet the government’s criteria, and high-priority development projects,” the report said. “The main purpose of this regulation is to ensure that guarantees issued by the state are provided transparently, in an equal manner, and in accordance with sound principles,” according to the rules.

In offering ‘sovereign guarantees’, which many nations do not offer to private sector projects, the “Government will charge a one-time fee of one percent of the guaranteed loan amount as well as an annual administrative fee of 0.25 percent”. Needless to add, the company must also cover the cost of the evaluation process, “which will be carried out by a party designated by the finance ministry or an independent audit firm”. If the company defaults on loan-repayment, the Government would settle the dues and reclaim the same ‘as a last resort’, after selling off the mortgaged assets – and reclaim it all from the debtor-company.

The public finance law does not require parliamentary approval for issuing sovereign guarantees. However, documents must be submitted to the Public Accounts Committee (PAC) of Parliament, the Maldives Independent pointed out. “The Government has previously provided sovereign guarantees for foreign companies. Most recently, a Turkish company contracted to build 5,000 housing units in the capital’s suburb Hulhumalé was provided with a sovereign guarantee worth $328 million.”

Going global

Near-simultaneously, the Finance Ministry has announced plans to go to approach the international finance markets with a sovereign-bond issue of $ 200-m. The nation’s first-ever international sovereign bond would “help raise finances for infrastructure projects… and…further pave the way for both private and State-owned companies to raise funds overseas”, the Maldives Independent said, quoting from a Finance Ministry explained statement. The process would also help “develop the country’s monetary system and capital market”, it added.

Preparing to enter the international capital market, the Government obtained the services of global credit rating agency Moody’s, which has since assigned a local and foreign currency issuer rating of B2, or “speculative and subject to high credit risk” investment. According to Moody’s, the rating and outlook reflect healthy growth prospects driven by the tourism sector, low institutional strength, a high debt burden, and “moderate susceptibility to event risks, predominantly driven by domestic politics”, Maldives Independent recalled.

Business savvy

For a Maldivian political leader, President Yameen is considered business-savvy and knowledgeable in studying and understanding global economic trends, the latter more than Jumhooree Party (JP) founder Gasim Ibrahim with the rags-to-riches story of his won. Through his seven-year ministerial stint under half-brother and long-term President, Maumoon Abdul Gayoom, Yameen had handled the Finance Ministry himself.

This apart, until his replacing Dr Mohammed Jameel Ahmed, his own chosen Vice-President running-mate from the successful 2013 elections, Yameen was also known to have apportioned socio-economic ministries to the overall care, and he himself working closely with then Finance Minister Abdulla Jihad. After his two trial-and-error attempts in as many years, Yameen now has Jihad, with expertise and experience in money matters and economy, as his third Vice-President, at present.

Yet, some of his decisions as Gayoom’s Finance Minister were not without controversies. As successor-President to Gayoom, rival MDP’s Mohammed ‘Anni’ Nasheed did order a probe into a multi-billion-dollar ‘oil import scam’, about overseas diversion of Iraqi oil when the West had black-listed Saddam Hussein. The respected south Indian weekly magazine, The Week, also carried an extensive news story on the same.

However, coming in the midst of the anti-Nasheed street-protests nearer home, which Yameen too led from the front, the ‘oil scam probe’ and the latter’s solitary confinement in an ‘island-prison’ by whatever name the Government of the day described both, made it all politically coloured and questionable. There has been no credible or not-so-credible reference to the ‘oil scam’ and probe since then, with some adversaries even blaming sections within the Nasheed administration for the probe not making any headway.

Well-developed

In the normal course, national governments in developing countries do not extend the facility of ‘sovereign guarantees’ to the private sector. In the case of Maldives, resort-tourism industry, one of the focus areas for the facility, is fairly well-developed, with FDIs having flowed in for long before the concept had been known to the rest of South Asia and the extended neighbourhood in some cases. Successive Governments have earned substantial income from leasing out very many islands for resort-tourism, yet the industry has also been getting concessions of the kind on that score as well.

Other sectors like ‘social housing’ as per Government criteria and ‘development areas’ are where international aid and assistance agencies continue to play a substantial role. These are also key areas where the Maldivian Government itself would be the key domestic player/promoter. Floating ‘special purpose vehicles’ (SPV) kind of funding arrangement or a separate public sector corporation for the purpose may be a more sustainable way out rather than enlisting the local private sector with ‘sovereign guarantees’.

This is more so considering that the Government is contemplating to offer ‘sovereign guarantees’ only to loans at four percent interest rate or below. International funding agencies under the agies of global institutions such as the UN are the more likely candidates for such lending facility apart from overseas Governments. From the Maldivian stand-point, too, enforcing the scheme from a ‘tiny nation’ background would be more feasible if the overseas party is a Government or a governmental entity.

‘Bad economics’

On the ‘bond issue’, likewise, Gayoom, who parted company with Yameen not very long ago, has said that the move would add to the nation’s debt-burden, and amounted to ‘bad economics’. The Maldives Independent quoted from Gayoom’s tweet, saying that the bond “will be a severe burden on the future well-being of Maldives”. It’s more so, considering that the Government’s debt is “significantly higher than peers” and is “projected to rise due to large-scale projects such as the China-Maldives Friendship bridge and airport expansion”, the Maldives Independent said further.

In context, the web-journal quoted the Moody’s to argue that this “anticipated rise in debt, coupled with a sizeable proportion of foreign-currency denominated borrowing that subjects debt servicing to exchange rate movements, act as fiscal constraints”. In an independent assessment the International Monetary Fund (IMF) (too) had warned early last year that Maldives is now facing “a high risk of external debt distress” due to large increases in capital-spending, which is entirely financed through external loans, Maldives Independent recalled.

Transformative

The ambitious projects could be ‘transformative’ in the long-run, the IMF said, but poses financing risks due to persisting fiscal imbalances, the Maldives Independent recalled. “With increasing expenditure outstripping income in recent years, the Government has been plugging revenue shortfalls through the sale of treasury bills and bonds. The bulk of deficit- financing was raised from domestic sources such as commercial banks, the pension fund, and private businesses.”

Presenting Budget-2017 to Parliament in November, Finance Minister Ahmed Munawar noted that public-debt is estimated to reach MVR 36.9 billion or 64 percent of GDP at the end of 2016. The Minister also said that the Government had planned “major changes” to deficit-financing in 2017, such as converting short-term debt to long-term and securing funds for development projects from the international financial market. “US dollar bonds and such new financial instruments will also be introduced,” Munawar had said, indicating the shape of things to come.

“The state’s debt will be managed through these reforms and pave the way for reducing the cost of debt servicing,” Minister Munawar said on in his Budget speech. But the Maldives Independent also quoted President Nasheed’s former Economic Development Minister Mohamad Razee, who questioned the benefits of raising finances through the sale of sovereign bonds instead of securing concessional loans. “Multilateral loans that we get from development agencies are with three to six percent interest rates. But it wouldn’t be the same with selling sovereign bonds,” he said.

While countries like the United States could sell treasury bills and bonds at low interest rates, Razee said the Maldives must offer higher interest rates due to the economic situation and low productivity. “That means it’s more that’s added to our debt,” the web-journal quoted him as saying. ““For a country that has productivity, it is not a problem. So can we grow our economy? Even if by taking loans, if you can improve the economy, that’s not a problem. It’s basically a short-term loan. Usual loans are for 10-15 years. But five years is a short time, ex-Minister Razee, a business consultant in private life, told the Maldives Independent.

Despite doomsday predictions of the kind, there is no denying the potential for high rates of job-creation attaching to such foreign investments, either through the FDI route or through loans and bonds. It also involves high revenue-returns for the Exchequer almost from day one, in terms of Customs and Excise duties. In a nation where economy needs all kinds of direct revenue-generation, even if through indirect taxation, and the growing percentage of youth in the population, needs to be gainfully employed and also go up the ladder in the socio-economic value-chain, both as peoples and as an Economy, such initiatives are new, bold moves.

President Gayoom built on the early initiatives of predecessor Ibrahim Nasir through much of the 30 long years of his presidential career. The concept of resort-tourism ensured as much, but after a time, it all became stagnant. It’s the next stage, where Gayoom’s successors, Presidents Nasheed and Waheed, missed the bus for a variety of reasons, all of them political and none, economic.

Yameen’s may be a step in that direction, independent of the long-term debt-burden, which however cannot leave it to future Governments to address in their own times of distress – pushing the nation into greater economic disaster than already. As an ‘economic wizard’, Yameen cannot allow that to happen – but of immediate concern even over the proposed schemes is to ensure that individual Maldivians get their dues, both in terms of jobs and family incomes, and also their own dollar-price does not vacillate, as in Nasheed’s time, contributing to the latter’s political downfall, in its own way.