FW: RAM Ratings reaffirms AAA/stable rating of Sabah Government’s RM1.0 billion bonds

 

 

Published on 15 Aug 2018.

RAM Ratings has reaffirmed the rating of the State Government of Sabah's RM1.0 billion Bonds (2014/2019) at AAA/stable. The rating is based on the Constitution of Malaysia's requirement that any state government borrowing be subject to the approval of the Federal Government. Although we do not consider federal government approval 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 issued with the approval of the Ministry of Finance, the issue rating reflects the Federal Government's long-term rating. 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 continues to bolster its debt-servicing ability. 

The State Government of Sabah enjoys a supportive relationship with the Federal Government due to its economic importance to the latter. The uptrend in the state's crude oil production subsequent to the Malikai, Gumusut Kakap and Kebabangan fields commencing operations, emphasises its significance. Sabah is also the top crude palm oil producing state in Malaysia, with an output of 5.2 million tonnes in 2017 (2016: 4.8 million tonnes) or 26% of the country's total production. "Despite the change in federal and state governments, their friendly ties should ease coordination and align policy directions," notes Esther Lai, RAM's Head of Sovereign Ratings.

Sabah's higher revenue adjustment capacity compared to states in Peninsular Malaysia, is another rating positive. Apart from yearly oil royalty payments from Petronas, additional revenue sources accorded by the Constitution made up 38% of the state's revenue in 2017 (RM1.6 billion). Pending any review of the Malaysia Agreement 1963 and Sabah's 20% oil royalty claim, the state shall continue to receive current federal government grants and allocations. We have not factored any potential extra revenue into the state's financials as negotiations will be lengthy. In any case, a recovery in commodity prices had boosted the government's revenue and widened its fiscal surplus in 2017. Although higher operating expenses are expected in 2018 owing to larger social and welfare payments and appropriation of the State Development Fund, a surplus budget of more than RM64.9 million could be achieved.

 

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

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my