Moody’s upgrades Sarawak’s rating to stable


MOODY’S Investors Service has raised the outlook on Sarawak’s rating to stable from negative. 

The rating agency noted that the change in outlook to stable from negative reflects Moody’s assessment that the recovery in oil prices since the onset of the coronavirus shock, combined with the settlement of the dispute with Petroliam Nasional Bhd (Petronas, A2 stable), and the associated enhanced visibility over the collection of the state’s sales tax on petroleum products. 

It added that the latest development will provide Sarawak’s government with greater fiscal flexibility to maintain relatively high levels of development expenditure while keeping solid levels of financial buffers over the next few years, which is a key source of credit support. 

In line with the change of outlook, Moody’s also affirmed the long-term issuer rating at A3, as well as affirming Sarawak’s Baseline Credit Assessment (BCA) at baa1. 

It added that the rating affirmation balances credit strengths stemming primarily from Sarawak’s sizeable fiscal reserves, which Moody’s expects to continue to exceed its net direct and indirect debt, as well as the state government’s track record of prudent fiscal policies and the ability to raise revenue, against credit challenges.

This includes Sarawak’s significant exposure to oil price developments, including developments related to global carbon transition, the sharp increase in on- and off-balance sheet development spending by the government in recent years, and governance constraints such as the lack of multi-year budgeting.

“Sarawak’s credit profile will be supported by the recovery in oil prices since the initial coronavirus shock as well as the enhanced visibility of the collection of its sales tax on petroleum products.

“In particular, these factors will allow the state government to maintain its relatively high levels of development expenditure while keeping the level of fiscal reserves solid as a buffer against future shocks,” it said in a recent statement. 

According to Moody’s, the Sarawak government derives around three-quarters of revenue from petroleum-related sources and contracts for the liquefied natural gas (LNG) that the state produces, which dominates its hydrocarbon production and is typically linked to Brent crude prices.

With oil prices around US$60 to US$70 (RM293.30) per barrel in 2021, Moody’s assumes the price level can be broadly maintained over the next two years and will provide a significant boost to the state’s finances. 

Moody’s added that the agreement reached with Petronas in the second half of 2020 (2H20) to pay sales tax on petroleum products provides certainty over Sarawak’s state budgets and revenue sources. 

“Notably, the payment by Petronas in 2020, which includes the settlement of its obligations in 2019, helped the state government eliminate its significant cash-financing shortfall despite the impact of the pandemic on oil prices and LNG sales. 

“Moody’s estimates the sales tax on petroleum products will account for an average of around 35% of Sarawak’s revenue over the next few years, with Petronas accounting for the bulk of this revenue source,” it added. 

The rating agency expects Sarawak to run relatively modest cash-financing surpluses of less than 5% of total revenue over the next few years, after a likely deficit this year of around 5% of total revenue because of weak LNG sales given the renewed movement and activity restrictions in many parts of Asia this year. 

Moody’s stated that Sarawak’s ratings would likely be downgraded if the state government were to significantly deviate from its prudent fiscal management policy that further eroded its net creditor position, including through persistently wide cash-financing deficits, a sharp drawdown of fiscal reserves, and a further, sizeable increase in net direct and indirect debt. 

“A downgrade in Malaysia’s rating would also likely lead to a downgrade in the state’s rating,” it warned.