RATING agency Standard and Poor's (S&P) on Dec 21 affirmed its A- long-term issuer credit rating on the Malaysian state of Sarawak with a stable outlook, saying that its "exceptional budgetary performance and liquidity" mitigate its elevated debt and contingent liabilities.
S&P said the upside to Sarawak's rating is constrained by the A-/A-2 foreign currency and A/A-1 local currency sovereign credit ratings for Malaysia. It added that although Sarawak has a higher stand-alone credit profile than Malaysia, it cannot be rated above Malaysia as it does not have greater operational and budget flexibility than the country to deal with potential stresses.
Sarawak's credit profile is supported by large cash surpluses and abundant reserves driven by oil sales, said S&P. "Prudent policymaking and satisfactory financial management have resulted in consistently large operating balances, which underpin its strong budgetary performance."
The planned introduction of a 5 per cent sales tax on petroleum exports will give Sarawak more budgetary flexibility and strengthen its stand-alone credit profile, though also intensifying economic concentration risks in the oil and gas-reliant state. S&P expects the tax to raise operating revenues by 51.6 per cent in 2019, compared with 2018. Any further ringgit depreciation would boost Sarawak's operating revenues as oil and liquefied natural gas are mostly sold in US dollars. With the boost from the sales tax, S&P expects debt to fall to 106 per cent of operating revenues in 2020, down from 178 per cent in 2017.
The state's real GDP is expected to grow by an average of 4.8 per cent per annum over the next two years, driven by stable outturns in global commodities trade, increasing activities in the higher value-added commodity downstream segment, sustained growth in tourism, and expansionary fiscal spending due to an ambitious infrastructure drive. Sarawak's capital expenditure on infrastructure, particularly in rural areas, is projected to rise sharply in 2019 and 2020 in line with the government's aim of making it a high-income state by 2030.
However, downside rating pressure could arise if Sarawak's revenue growth deteriorates significantly, for instance due to volatile commodity prices, thus weakening the state's overall budgetary performance and increasing tax-supported debt as a proportion of operating revenues. S&P said it could also lower the rating if Sarawak's state-owned enterprises see a material deterioration in financial performance, or if there is a lowering of the sovereign ratings for Malaysia.
S&P noted that although Sarawak's liquidity is assessed to be a credit positive and its internal cash flow generation is robust, the state's contingent liabilities are high due to the renationalization of Sarawak Energy Bhd and the state's potential indirect exposure to large commercial state-owned enterprises.
In the same report, S&P affirmed its A- long-term issue credit rating on Equisar International Inc.'s US$800 million guaranteed notes (due June 2026) and SSG Resources Ltd.'s US$800 million guaranteed notes (due October 2022), of which the state of Sarawak is the ultimate owner.