Memo

Government Publishes New Policy on Issuing Sovereign Guarantees

January 11, 2023

Introduction

The Government has published a new policy (Policy No: 2022/G-43) on 18 December 2022 regarding issuing sovereign guarantees in financing transactions.

The most notable change is the removal of the “annual guarantees limit” which the Minister of Finance had to declare under the previous policy. The policy also notably removes the requirement for the Ministry of Finance (or an appointed independent auditor) to carry out legal and financial due diligence over a borrower and the requirement to scrutinize the borrower’s
capacity to repay.

Other key changes are introduction of (i) independent institutions and local councils as parties eligible for sovereign guarantees and (ii) an additional object (i.e. financings which are done with government leave) which may make a transaction eligible for collateralization by a sovereign guarantee.

Please see table below of the key changes:

Previous Policy position	New Policy position
Parties eligible are: State owned enterprises Companies registered or re-registered in Maldives	Parties eligible are: State owned enterprises and their subsidiaries Companies registered or re-registered in Maldives Independent institutions formed by law Councils that fall within Law No: 7/2010
Objects eligible are: Tourism sector development projects Social housing projects that meet Government criteria Other developmental projects that are important to the Government	Objects eligible are: Tourism sector development projects Social housing projects that meet Government criteria Other developmental projects that are important to Government Financial transactions that are given permission by Government
Sovereign guarantee shall only be issued if the effective rate of interest of the underlying loan does not exceed 3.5% (exclusive of LIBOR)	Sovereign guarantee shall only be issued if the effective rate of interest of the underlying loan does not exceed 3.5% (exclusive of “variable interest rate”) (LIBOR replaced) but this can be overturned with permission from Minister Changes in documents to be submitted with guarantee application, separate list for institutions / councils and companies. Companies are to submit a MIRA Tax clearance report now. Parties/loans not eligible remain the same except that under the new Policy, the Minister may give permission to issue guarantees for such parties depending on the circumstances For an institution or a council, in determining the limit for the issuance of a guarantee, the institution’s credit risk, and the project feasibility will be considered. In addition to this, the country’s economic condition, government’s financial capacity and the financial impact of the guarantee on the government shall be taken into consideration. If it is determined that the risk to the government of issuing the particular guarantee is too high, a security may be demanded by the government. For companies, the relevant clause remains the same (s.9 old policy, s.10 new policy)



The Minister of Finance will also declare a guarantee issuance limit annually (s.9)	Requirement removed
A due diligence and financial capacity assessment of the Company should be conducted by the Ministry of Finance and Treasury or an independent party appointed upon the agreement of both parties (s.12)	Requirement removed
For monitoring purposes, the company being issued the Guarantee is to update the Government on the status of the project quarterly. The MOFT is also to conduct physical inspections of the project site at least twice a year and monitor loan transactions and carry out a project audit and evaluation within a set time period (s.13).	For monitoring purposes, the company being issued the Guarantee is to update the Government on the status of the project as planned out by the Government. The company is also to provide any other information as requested by the Ministry (s.14).
Sovereign guarantees issued shall be audited in accordance with a set regulation, and any information required for the audit should be provided by the beneficiary of the guarantee and the guarantee applicant company (s.16)	Requirement removed

Commentary

The new policy reduces red tape around provision of sovereign guarantees streamlining the sovereign guarantee backed financing process. On paper, the removal of requirements for (i) declaration of an “annual guarantee limit” and to carry out (ii) due diligence and financial capacity assessment of the borrower may appear as a cause for concern. However, in practice the Ministry of Finance had implemented the maximum limit with such fluidity that the limit afforded no real practical benefit as a lever over maximum borrowing back by sovereign guarantees. Similarly, varying degrees of scrutiny over the repayment ability of primary obligors who had the benefit of such guarantees were implemented in practice. The removal of these requirements in the new policy is therefore a simple reflection of these realities. This is of course not to say that these realities are perfectly acceptable.

Moody’s credit rating for Maldives was last set on 17 August 2021 at Caa1 with a stable outlook. Fitch’s credit rating for Maldives was last reported on 13 October 2022 at B- with negative
outlook. Both rating agencies in their reports observed that high sovereign backed funding as part of their reasoning to downgrade Maldives’ credit rating. It is however expected that a developing economy like Maldives with a thirst for development infrastructure projects will look to remove hurdles that might limit the attraction of developmental funding. Particularly, as the downgraded credit rating works to remove certain conventional financing avenues available for public or public-private partnered development projects.

One criticism of the previous policy when it was amended in September 2017 was the ability for private enterprises to request for sovereign guarantees for the private borrowings. This opens up the policy for abuse and perceived ‘favoritism’ to come into play when granting sovereign guarantees to back borrowings of private businesses. This exposes the government to credit risk arising from defaulting private parties. One such sovereign guarantee issued to Sun Travel and Tours Private Limited was called in by Exim Bank of China in mid-2020¹. This had the Government embroiled in assisting a private party with its refinancing efforts in order to avoid a sovereign default.

We note that with this new policy, the provision as it appeared in the previous policy still remains and together with the removal of the requirement for an independent due diligence to be carried out this could potentially provide for a repeat of the aforementioned situation or such similar situations. We hope that due care and diligence would be exercised in granting of such guarantees under this new policy.

The introduction of local councils as potential subjects who could under the new policy receive sovereign guarantee backed funding is a very welcome change. Much of the large development projects in Maldives had historically largely been focused in Male’ (the capital city). This change reflects the present government’s view for greater decentralization and urbanization of islands other than the Male’.

What remains to be seen is how the change in policy will work to attract financing for development projects - the announcing of such has been a common feature in all election years – with the present government keenly looking for re-election in 2023.

¹ Please see media report at https://edition.mv/news/18132