RAM Ratings assigns AAA/stable rating to Sabah Government’s proposed RM1 billion bonds

Published on 14 November 2014

RAM Ratings has assigned AAA/stable rating to the State Government of Sabah's RM1 billion Bonds (2014/2019). Part of the proceeds from the proposed RM1.0 billion Bonds will be used to refinance the State’s existing RM544 million Bonds (rated AAA/stable), which will mature in December 2014; the balance will be used to support the State Government’s development agenda. The assigned issue-specific rating is based on our opinion that under the Constitution of Malaysia, any borrowing by state governments is subject to the Federal Government’s approval. This approval underscores the implicit support of the Federal Government and reflects its role as the lender of last resort in the spirit of the Federation.

As the proposed RM1.0 billion Bonds issuance have been approved by the Ministry of Finance, its rating is equated with that of the Federal Government. Furthermore, in line with our rating criteria and methodology, Rating Malaysian State Governments (published in June 2014), we also analyse Sabah’s economic and budgetary performance, which are strong and supportive of its debt-servicing ability.

Home to key commodities in Malaysia, Sabah produces 30.1% of the country’s CPO and contributes about 60% of the nation’s total export value of crude oil. These rich endowments of natural resources have contributed significantly to the State’s economy. According to the recent State budget announcement, 2015 GDP growth is expected to clock in between 4.5% - 5%. Although Sabah is a commodities-centric economy, we note that strong domestic demand and the relatively sustainable global demand for primary commodities provided some resilience to Sabah’s economy.

Moreover, Sabah’s stronger revenue-generating ability compared to its counterparts in Peninsular Malaysia is another rating positive. Under the Constitution, the State Government of Sabah is accorded additional revenue sources, including entitlement to yearly cash payments from national oil giant Petronas. The expectation of a budget surplus in 2015 reinforced our view on Sabah’s healthy fiscal position. Additionally, the State’s sturdy liquidity position – where reserves are able to cover at least 6 months’ expenditure – moderates any short-term risk.

Media contact
Lynette Lee
(603) 7628 1182
lynette@ram.com.my