A selloff in Islamic bonds from the Maldives has intensified in recent weeks as investors rush to dump the island nation’s debt on fears of default, Bloomberg News has reported.

The dollar-denominated sukuk bonds due 2026 dropped below 70 cents on the dollar this week, a record low. With double-digit losses this month, the debt is the worst performer on the Bloomberg EM Sovereign Total Return Index. The notes traded at 69.5 cents on Wednesday, down from about 93 cents in June.

The notes came under renewed pressure over the past two weeks after Bank of Maldives, the archipelago’s biggest commercial bank, introduced new limits on spending in foreign currency for its customers. Fitch Ratings also downgraded the country’s standing for the second time since June, citing increased default risk. Those decisions spooked many bondholders.

The Maldives has about $500 million in outstanding sukuk debt due in 2026, according to data compiled by Bloomberg, and now all eyes will be on the next coupon payment date on Oct. 8.

“The default risk in the Maldives sukuks has increased as the country has large external payments coming due and not enough FX reserves to service them,” said Purvi Harlalka, a senior emerging-market sovereign debt strategist at M&G. “Barring an eleventh-hour infusion of foreign exchange from a friendly overseas government such as China, GCC or India, the non-payment of the October coupon is a plausible possibility.”

Fitch downgraded Maldives' rating to CC on August 29th. It is the second time Fitch has downgraded Maldives' rating this year. In June, Fitch downgraded the rating from B- to CCC+.

Fitch's decision reflects concerns over the Maldives' deteriorating external financing and liquidity metrics.

"This is underscored by a recent material decline in the foreign-reserve buffers alongside elevated external debt service and limited external financing inflows," it said in a statement.

The Maldives' foreign exchange reserves declined by approximately 20% to USD 395 million in July, from USD 492 million in May, marking the lowest level since December 2016, it noted.

The Maldivian government faces USD 50 million in sovereign external debt-servicing obligations due in the fourth quarter of this year, in addition to USD 64 million in publicly guaranteed external debt. Fitch expects the Maldives' current account deficits to remain high in the short to medium term due to extensive public investment and heavy dependence on imports of food, energy, and capital goods.

They further added that the total external debt servicing will increase to USD 557 million in 2025 and exceed USD 1 billion in 2026, including repayment of a USD 500 million sukuk.

The agency warned that further downgrades could follow if the Maldives fails to meet its debt obligations within grace periods.

Fitch typically does not provide outlooks for countries rated ‘CCC+’ or below.