Sarawak well positioned to respond to challenging operating environment, falling commodity prices
KUCHING: International ratings agency Moody’s Investors Service (Moody’s) expects Sarawak to remain resilient against the impact of falling commodity prices in the near term.
However, it warned that a prolonged period of low oil prices could erode the state’s financial strength.
“The rise in the costs of servicing Sarawak’s foreign-currency debt over the past year should be manageable, in view of its significant budget flexibility,” the ratings agency said in a statement yesterday.
Moody’s conclusions were contained in its just-released report, “Sarawak – Sub-sovereign – Malaysia: Sarawak’s Conservative Budgetary Practices, Strong Liquidity Blunt the Effect of Falling Oil Prices”.
It said Sarawak will likely face an increase in debt-service costs if the ringgit’s decline persists.
Over the longer term, Sarawak will also face higher repayment costs when its US$2 billion of outstanding foreign debt matures.
Debt-servicing costs already amount to a hefty 25.8 per cent of the state’s budget.
“Meanwhile, a drop in oil prices since mid-2014 by 54.4 per cent has weighed on exports and dampened growth, while the effects are partially mitigated by the lower ringgit,” Moody’s added.
Despite the challenging operating environment, the ratings group said Sarawak’s conservative budgetary estimates and low operating expenditures should support ongoing, although smaller surpluses.
“However, if oil prices remain at their current lows over the longer term, then we would expect a deterioration in the state’s financial position,” it forewarned.
Sarawak obtains up to 70 per cent of its budgetary revenues from oil and gas excise taxes and dividends.
Weaker oil prices will dampen these revenues.
On a positive note, Moody’s highlighted that Sarawak plans to avoid new borrowing provides comfort that its debt burden will ease.
“The state also has a strong liquidity buffer accumulated through its budget surpluses.
“It currently holds reserves of nearly 2.5 times the total for the direct and indirect debt serviced by the state, providing it with a substantial buffer against currency movements.”
Responding to the report Second Finance Minister Dato Sri Wong Soon Koh told The Borneo Post yesterday although oil and gas is a major revenue earner for the state the recent decline in oil prices has not impacted its revenue greatly.
“Moreover, to mitigate the impact of declining oil prices, the state has over the years diversified its sources of revenue.
“We know that the state is susceptible to global and regional volatility with the continual economic uncertainties which will directly or indirectly affect the state because of volatility in demand in our commodities such as oil and gas, crude palm oil and timber.
That is why we have always adopted a sound economic financial policy and maintained a healthy level of reserve to provide fiscal flexibility in time of economic difficulties, said Wong who is Local Government and Community Development Minister.
He pointed out that the state had managed its financial resources in accordance to the best financial practices to ensure that the state could continue to sustain its development agenda as well as to maintain investors’ confidence.
“We have been committed to a prudent, disciplined and conservative approach to our financial management all these years.”
Meanwhile, Land Development Minister Tan Sri Datuk Amar Dr James Jemut Masing when contacted concurred with Wong that Sarawak would come out of the price slump stronger because of its prudence and wise spending by channeling state funds to “businesses or industries that generate income”.
“A large part of our budget will be used on development projects. This is for investment as these development projects will generate more income. In short, we don’t spend, we invest,” said Masing.
This model of managing state finance, according to Masing was started by former Chief Minister Tun Pehin Sri Abdul Taib Mahmud who had set a solid foundation for Sarawak’s finance and economy.
He added that the state had always adopted a “forward looking financial planning”.
“Sarawak’s economy initially relied on timber and then oil and gas industry. Understanding that oil and gas is depleting, we are now building up our palm oil industry.”
“We cannot just be depending on our natural resources, so looking forward, we are also developing our energy industry through the production of green energy through dam building. This is what I call a forward looking financial planning.”