Maldives Government Dumps Sovereign Guarantee Rules, Opens Floodgates for Developmental Financing

The Maldivian government has made significant changes to its policy on sovereign guarantees in financing transactions. Effective from December 18, 2022, the new policy removes key requirements that had been a hurdle for companies and institutions seeking funding.

Key Changes

• Removal of annual guarantee limit declaration: The Finance Minister is no longer required to declare an annual guarantee limit.
• Elimination of due diligence and financial capacity assessment: Borrowers are no longer subject to a thorough assessment of their financial capabilities.
• New objects eligible for sovereign guarantees: State-owned enterprises, their subsidiaries, companies registered or re-registered in Maldives, independent institutions formed by law, and councils that fall within Law No: 7/2010 can now receive sovereign guarantees.

New Opportunities

The new policy introduces a new object that can be eligible for sovereign guarantee backed financing - financings which are done with government leave. This is expected to attract more developmental funding into the country.

Industry Observations and Concerns

Industry observers believe that the removal of requirements will streamline the process for companies and institutions seeking sovereign guarantees, making it easier for them to access funding. However, some critics have raised concerns about the potential risks associated with providing sovereign guarantees to private businesses, citing instances where the government has had to intervene in refinancing efforts to avoid a sovereign default.

Credit Ratings

The new policy change is expected to be welcomed by investors as it reflects the present government’s view for greater decentralization and urbanization of islands other than Male’, with local councils being introduced as potential subjects who could receive sovereign guarantee backed funding. However, Moody’s credit rating for Maldives was last set at Caa1 with a stable outlook in August 2021, while Fitch’s rating was downgraded to B- with a negative outlook in October 2022, citing high sovereign-backed funding among the reasons.

Conclusion

The policy change has been welcomed by some as it reflects the present government’s view for greater decentralization and urbanization of islands other than Male’, with local councils being introduced as potential subjects who could receive sovereign guarantee backed funding. However, what remains to be seen is how the change in policy will work to attract financing for development projects.

Additional Documents Required

Companies are now required to submit a MIRA Tax clearance report as part of their application.