Published on 02 Aug 2017.
RAM Ratings has reaffirmed the AAA/stable rating of the State Government of Sabah’s RM1.0 billion Bonds (2014/2019). The rating is based on the Constitution of Malaysia’s requirement that any borrowing by state governments be subject to the approval of the Federal Government. In line with RAM’s rating criteria and methodology, Rating Malaysian State Governments, we have also analysed Sabah’s economic and budgetary performance, which remains strong and highly supportive of its debt-servicing ability. Although RAM does not consider approval by the Federal Government to be a direct guarantee, such an endorsement underscores the government’s implicit support and reflects its role as the lender of last resort in the spirit of the federation. As the Bonds had been raised and issued with the approval of the Ministry of Finance, the issue rating reflects that of the Federal Government.
The Sabah Government enjoys a supportive relationship with the country’s current administration. “In 2016, the federal development allocation to Sabah increased to RM3.1 billion, or 83% of the State’s total development expenditure, and is expected to remain high at RM4.5 billion in 2017,” notes Esther Lai, RAM’s Head of Sovereign Ratings. The Federal Government did not provide the State with two special grants in 2016 (RM27.6 million on average from 2011 to 2015) due to the underperformance of the former’s revenue growth, however, our view of its supportive stance towards the State remains, given that the Federal Government had acted within the provisions of the Constitution.
Sabah’s higher revenue adjustment capacity compared to states in Peninsular Malaysia, is another rating positive. The Constitution accords Sabah additional revenue sources, which made up 40% of the State’s revenue in 2016 (RM1.5 billion), a 7.7% increase y-o-y. With regard to the recent introduction of the Tourism Tax Bill 2017, the State is still in discussion with the Federal Government on its implementation. The legislation could complicate the State’s plans to implement heritage or conservation taxes. Nonetheless, the growth momentum of the vibrant tourism sector is expected to be maintained in 2017, with an estimated 3.6% increase in arrivals and tourism receipts amounting to 10% of GDP.
Notwithstanding lower average prices of crude petroleum in 2016, total revenue clocked in at RM3.84 billion (2015: RM3.92 billion), boosted by higher dividends, royalties on forestry products, CPO sales taxes and port and harbour dues. As total expenditure was streamlined, Sabah’s overall fiscal position improved to a mild surplus of RM33.19 million in 2016 (2015: RM222 million deficit). Despite deterioration in its debt-to-revenue ratio in 2016, Sabah’s cash and investments-to-gross debt ratio was stronger – highlighting the State’s fiscal prudence.
Besides a high poverty level, Sabah also appears to be more vulnerable to geopolitical risks compared to other Malaysian states, in view of its close proximity to Southern Philippines and given that migrants have co-existed with the local community. Following the declaration of martial law in Southern Philippines in late-May, the Eastern Sabah Security Command has been on high alert. Despite 10 kidnapping cases in 2016 (2015: 1 case), overall tourist arrivals in Sabah peaked at 3.43 million, surpassing that of 2013, the previous best.
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