RAM Ratings reaffirms AAA rating of Sabah State Government’s bonds

Published on 29 August 2013

RAM Ratings has reaffirmed the AAA long-term rating of the State Government of Sabah’s (“the State Government”) RM544 million Bonds (2009/2014) (“the Bonds”), with a stable outlook. The Bonds had been raised and issued with the approval of the Ministry of Finance. Although we do not consider this approval as tantamount to a direct guarantee by the Federal Government, we believe that support will be readily extended to the State Government, if required. Notably, the State Government continues to enjoy a supportive relationship with the ruling Barisan Nasional (“BN”) coalition.

Sabah (“the State”) is endowed with a wealth of minerals, agricultural land, biodiversity and cultural heritage – which form the backbone of its economy. The primary sector (agriculture and mining) is the mainstay of the State’s economic output – contributing approximately 40% of its GDP in 2010. Sabah’s economy relies much on the exports of its primary commodities. It lays claim to Malaysia’s largest areas of oil palms, i.e. 1.4 million hectares or 29% of the country’s total planted hectarage. The State is also an important cog of the Malaysian economy by virtue of its crude-oil production. Demand for both these primary commodities is seen to be relatively sustainable, thus providing some resilience to Sabah’s economy. Aside from the primary sector, the services sector – which represents half of the State’s economy – is an important growth driver too. The services sector, while largely tourism-driven, also caters to the increasing size and income of the State’s population.

The State Government boasts a stronger fiscal-adjustment capacity than its counterparts in Peninsular Malaysia. Under the Constitution, the State Government is accorded additional revenue sources, including import and excise duties on petroleum products, export duties on timber-related products, fees and dues from ports and harbours, water rates, revenue from licenses connected with water supplies and services as well as state sales taxes. The State Government is also entitled to yearly cash payments from national oil giant Petronas, equivalent to 5% of the value of the petroleum extracted from areas in Sabah, under an agreement executed on 14 June 1976. As the State Government derives a significant proportion of its revenue from commodities, its budgetary performance is highly sensitive to commodity price movements.

The recent incursion by armed militants of the Sultanate of Sulu had little immediate direct impact on the State’s economy and overall public finances, as evidenced by the robust growth of its palm-oil production, tourist arrivals and investment activity during and in the month following the episode. Furthermore, the federal authorities have taken steps to address security concerns, highlighting once again the supportive relationship that the State Government enjoys with its federal counterpart. Despite the minimal direct economic impact, RAM will continue monitoring any reputational damage that may arise from this incident.

Media contact

Jason Fong

(603) 7628 1103

jason@ram.com.my