RAM Ratings reaffirms AAA/Stable rating of Sabah Government’s RM1.0 billion Bonds

Published on 14 Aug 2019.

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RAM Ratings has reaffirmed the rating of the State Government of Sabah’s RM1.0 billion Bonds (2014/2019) at AAA/Stable. The reaffirmation is premised on the requirement in the Constitution of Malaysia that any state government borrowing be subject to the approval of the Federal Government. Further, our analysis in line with RAM’s criteria and methodology for rating Malaysian state governments indicates that Sabah’s economic and budgetary performance remains sturdy and favourable to its debt servicing ability. Although RAM does 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. Given that the bonds were issued with the approval of the Ministry of Finance, the issue rating is equated with Malaysia’s long-term rating.

The Sabah government enjoys a supportive relationship with the Federal Government. Considering that Parti Warisan Sabah and its state-level Pakatan Harapan partners command a majority in the State Assembly, policy alignment between the state and federal governments eases legislative planning and implementation processes. “According to Malaysia’s Budget 2019, the federal development allocation to Sabah ascended 22% to RM5 bil, emphasising the State’s importance,” notes Esther Lai, RAM’s Head of Sovereign Ratings.

Another positive driver anchoring the rating is the state government’s upward-trending revenue. Sabah is granted additional revenue sources by the Constitution, which contributed 33% of the State’s revenue in 2018 (RM1.4 bil). Due to a higher average crude oil price in 2018, total revenue clocked in at RM4.3 bil. Sabah’s overall fiscal balance recorded a surplus of RM166 mil in 2018 (2017: RM149 mil surplus) owing to higher revenue and lower development expenditure. The 50% of tourism tax receipts from the Federal Government is anticipated to widen the fiscal space. Moreover, the state government has been setting more stringent KPIs for revenue collectors and studying potential new taxes on some minerals and mining commodities. The progress of these initiatives, however, will be protracted.

Sabah had accumulated reserves of RM3.77 bil as at end-2018 (+35% y-o-y). Against debt outstanding of RM3.79 bil, it is in a commendable near-zero net debt position. In the lead-up to the maturity of the RM1.0 billion Bonds this year, RM610 mil had been set aside as at end-2018 for the redemption of the facility, reflecting prudent fiscal management. Besides, as the Federal Government plans to write off loans extended to state governments since 2001 for rural water supply projects, we estimate that Sabah’s debt load may potentially be reduced by RM1.3 bil in the future.

The issue rating cannot be upgraded as it is already the highest on the rating scale. Conversely, any material erosion of federal government support for the State, albeit highly unlikely, would exert pressure on the rating.


Analytical contact
Toh Wei Liang    
(603) 3385 2620

Media contact
Padthma Subbiah
(603) 3385 2577


The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

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