RAM Ratings reaffirms AAA(s) issue rating of Aquasar Capital, Sarawak government’s funding conduit

Published on 02 Oct 2019.

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RAM Ratings has reaffirmed the AAA(s)/Stable rating of Aquasar Capital Sdn Bhd’s (Aquasar Capital) RM1,500 million Sukuk Murabahah Programme (2014/2029). Aquasar Capital acts as the Sarawak government’s funding conduit for the sukuk programme to fund the development of the Kuching Centralised Sewerage System. The operations and maintenance of the project has no bearing on Aquasar Capital’s repayment of the sukuk. Although the Sarawak government has not extended an explicit guarantee to Aquasar Capital in respect of the sukuk, the issue rating reflects Sarawak’s credit strength, as periodic payments for outstanding sukuk are borne by the state through budgetary appropriation.

The reaffirmation of the rating is based on Sarawak’s strong financial position, underpinned by ample fiscal reserves amounting to RM30 bil as at end-2017 (end-2013: RM23 bil), that serve as a strong anchor against commodity price volatility in view of the state’s heavy reliance on natural resources for GDP growth and fiscal revenue. These reserves provide a comfortable coverage of 3.8 times the state’s hefty total adjusted debts of RM7.84 bil as at end-2017, with a similar coverage level maintained in 2018. Sarawak’s fiscal revenue is the highest of all Malaysian states, with large receipts from hydrocarbon royalties, dividends from investments in oil and gas downstream companies and additional sources provided for by the Federal Constitution such as duties and sales taxes. While the scope of the sales tax has been widened to include hydrocarbon-related products beginning 2019, the actual collection in the current year remains unclear at this juncture pending the outcome of federal-state negotiations on Sarawak’s rights and autonomy. This poses potential risks to the state’s fiscal and economic outlook, given that its expanded Budget 2019 hinges substantially on higher projected revenue – mainly from increased tax collection – to fund a larger development expenditure.

Sarawak’s critical position within the federation is premised on its rich hydrocarbon reserves and significant political representation. In view of the state’s strategic importance, federal government support is expected to be readily available, although assistance is unlikely to be required, considering the state’s sturdy government finances. Despite Sarawak’s greater assertion of its constitutional rights, inter alia the prerogative to exercise control and regulatory purview over the state’s energy resources, we expect continuous federal-state negotiations to alleviate existing differences. Nonetheless, protracted discussions on this front could cast uncertainties on the state’s development agenda. 

In view of the socio-economic development gap between Sarawak and peninsula states, the federal and state governments continue to allocate substantial resources to upgrade the state’s infrastructure and key industries. This can be seen in the Sarawak government’s increasing pivot towards self-financed development plans, along with annual federal funding earmarked for the state and projects such as the Sarawak Corridor of Renewable Energy and Pan-Borneo Highway. Sarawak’s y-o-y GDP growth decelerated to 2.0% in 2018 (2017: 4.5%), mainly due to reduced production of natural resources and slower activity in related downstream industries. That said, growth will likely pick up pace in 2019 on firmer external demand for LNG which supports the mining and manufacturing sectors, steady growth momentum of the services sector and rapid construction activity driven by infrastructure and capacity expansion projects.

The rating will come under pressure in the event of persistently low commodity prices and/or significant spending that materially impact Sarawak’s fiscal position, leading to an erosion of fiscal reserves and a steep escalation of debts. Prolonged weakness in GDP growth and an increase in contingent liabilities beyond levels that the state’s fiscal reserves can support will also weigh on the rating.


Analytical contact
Cheong Kah Weng
(603) 3385 2617

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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