KUCHING: RAM Ratings yesterday reaffirmed the AAA/stable rating of the state government of Sabah’s RM1.0 billion Bonds (2014/2019).
The rating is based on the requirement in the Constitution of Malaysia that any borrowing by state governments be subject to the approval of the Federal Government.
In line with RAM’s criteria and methodology for Rating Malaysian State Governments, the firm also analysed Sabah’s economic and budgetary performance, which remains strong and favourable to its debt-servicing ability.
“Although we do not consider the approval by the Federal Government as a direct guarantee, such an undertaking underscores the government’s implicit support and reflects its role as the lender of last resort in the spirit of the federation,” the ratings agency said in a statement yesterday.
“As the bonds had been raised and issued with the approval of the Ministry of Finance, the issue rating is equated with the rating of the Federal Government.”
RAM noted that the Sabah government continues to enjoy a supportive relationship with the ruling Barisan Nasional coalition.
“Political alignment with the Federal Government facilitates development initiatives, as seen in the higher federal development allocation of RM4.9 billion for Sabah in 2016, from RM4.07 billion in 2015,” observed Esther Lai, RAM’s head of Sovereign Ratings.
“These funds will be channelled towards the Pan-Borneo Highway, housing assistance and rural electricity as well as roads and water under the 11th Malaysia Plan, to name a few.
“Progress of the Sabah leg of the Highway’s construction is in its infancy, having gathered steam after the approval of the Private Delivery Partner Agreement in March 2016.”
Sabah’s higher revenue adjustment capacity compared to states in Peninsular Malaysia, is another rating positive. The Sabah Government is accorded additional revenue sources by the Constitution, which contributed approximately 36 per cent of the State’s revenue in 2015.
Nonetheless, the deferment of new state sales taxes – which led to forgone revenue of RM80 million in 2015 – highlights the need for the State to balance revenue gains and economic development.
Given that the State Government derives a significant portion of its revenue from commodities, its budgetary performance is highly sensitive to commodity price movements.
The larger than expected decline in CPO production in 1H 2016 due to a prolonged period of unfavourable weather conditions outweighed the uptick in CPO prices.
“Meanwhile, revenue from petroleum royalties may in our view fall short of the budgeted amount as increased oil and gas production and a weaker ringgit may not sufficiently compensate for persistently low oil prices.
“Overall, we expect a decline in government revenue in 2016, albeit still head and shoulders above that of the state’s counterparts in the peninsula. Sabah has a sturdy liquidity position, where reserves cover at least six months’ expenditure.
Following recent abductions by suspected Philippine militants in April 2016, RAM onserved that barter trade with neighbouring countries along the east coast of Sabah has been temporarily suspended while tight security screenings are conducted to combat smuggling activities.
“Although co-operation from the Philippine government has been forthcoming, we will continue to observe the island republic’s foreign policy stance subsequent to the election of Rodrigo Duterte as its new President.
“Despite security concerns, tourist arrivals in the State grew 5.2 per cent in 1Q16. With additional direct flights, the resumption of climbing activities on Mount Kinabalu and the opening of the Sun Bear Rehabilitation Centre, the tourism sector is envisaged to pick up in 2016.”