RAM Ratings has reaffirmed the AAA/stable rating of the State Government of Sabah's RM544 million Bonds (2009/2014)

Published on 28 August 2014

RAM Ratings has reaffirmed the AAA/stable rating of the State Government of Sabah's RM544 million Bonds (2009/2014). The is based on our opinion that under the Constitution of Malaysia, any borrowing by state governments is subject to the Federal Government’s approval. Although RAM does not consider this approval as a direct guarantee by the Federal Government, it underscores the implicit support of the Federal Government and reflects its role as the lender of last resort in the spirit of the Federation. The Bonds had been raised and issued with the approval of the Ministry of Finance. The issue rating is therefore equated with the Federal Government’s rating. 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.
The State Government of Sabah continues to enjoy a supportive relationship with the ruling Barisan Nasional coalition. This political alignment with the Federal Government facilitates the State Government’s ability to pass legislation, thus easing planning and implementation processes. 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 import and excise duties on petroleum products, export duties on timber-related products, fees and dues from ports and harbours, a state sales tax, as well as revenue from licences connected with water supply and services. The State is also entitled to yearly cash payments from national oil giant Petronas.
As the State Government derives a significant portion of its revenue from commodities, its budgetary performance is highly sensitive to commodity price movements. That said, the State’s sturdy liquidity position – where reserves are able to cover at least 6 months’ expenditure – moderates any short-term risk. Notably, Sabah is endowed with rich natural resources, which form the backbone of its economy. The primary sector, comprising the agriculture and mining industries, is the main growth driver for the State. As Sabah is home to 30% of Malaysia’s crude palm oil and produces about 60% of the nation’s crude oil, its economy relies on exports of these commodities. Although such a commodities-centric economy is susceptible to price shocks, we note that global demand for these primary commodities is relatively sustainable, thus providing some resilience to Sabah’s economy.
Apart from the primary sector, the services sector – which is largely tourism-driven – is also the mainstay of the State’s economic output. Despite the incursion by armed militants of the Sultanate of Sulu last year, tourist arrivals in Sabah climbed up 17.6% to 3.4 million while tourism receipts contributed close to 10% of its GDP. However, the recent spate of abductions and the extended sea curfews in 6 districts along the eastern coast of Sabah may have a reputational cost to certain tourism-dependent and fishing areas. The establishment of the Eastern Sabah Security Command is part of the various steps taken to address security concerns.

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