RAM Ratings assigns preliminary AAA(s) rating to sukuk by Sarawak’s SPV, Infracap Resources

Published on 27 Jan 2021.

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RAM Ratings has assigned a preliminary rating of AAA(s)/Stable to Infracap Resources Sdn Bhd’s (Infracap Resources) proposed RM15 bil Sukuk Murabahah Programme (2021/2041). Infracap Resources is a funding vehicle of the Sarawak state government (the State) through wholly owned subsidiary, Infracap Development Holdings Sdn Bhd. Based on the entity set-up, transaction structure and representations by the State Financial Secretary, the servicing and repayment of the sukuk will emanate from the Sarawak state government, with monies to be regularly set aside from its annual budget for this purpose. As such, RAM has equated Infracap Resources’ Sukuk rating with the State’s credit strength, which we assess to be robust.  

Sarawak boasts outstanding balance sheet metrics. Its fiscal revenue and reserves are by far the highest among all states in Malaysia, thanks to a wide revenue base and the accumulation of past fiscal surpluses from prudent budgetary management. The State Government derives substantial income from the energy sector (i.e. hydrocarbon royalties and dividends from the State’s investments in oil and gas downstream companies), crude palm oil and timber receipts, as well as duties and state sales tax provided for by the Federal Constitution. Notwithstanding large development expenditure allocations, the State Government anticipates a small fiscal surplus for FY 2020 and Budget 2021, buoyed by a significant 5% state sales tax on petroleum products which came into effect in FY 2019. 

The State has an enormous cash pile, estimated at RM23 bil as at end-2020. It can afford circa 2.5 times coverage of the State Government’s total expenditure for 2021, which are superior to the estimated median of other Malaysian states, at 0.7 times. The RM15 bil sukuk programme, if drawn down fully by end-2021, would elevate the State’s total debt – adjusted for its special-purpose vehicles (SPVs) debts net of sinking funds – to an estimated RM24.4 bil (from RM5.7 bil in 2019). This would reduce Sarawak’s reserves to total adjusted debt coverage ratio to 0.9 times by end-2021 (2019: 4.2 times). As other state-sponsored SPV debts (~RM9.5 bil) are set to mature over the next eight years, the State may not be in a net cash position until at least 2026.  

However, the State’s liquidity remains superior, with its debt repayment ratio as at end-2021 estimated at 17% (end-2019: 26%). Annual debt repayments – including contributions to sinking funds – range between RM1.7 bil and RM2.6 bil over the next five years, relative to the State’s annual revenue of circa RM10 billion. The Sarawak Government’s well spread-out debt maturity profile, solid track record of financial discipline and fiscal management provide assurance against potential fiscal slippage from a heftier debt load.

Sarawak has significant political representation in the Federal Government, holding the largest number of seats (31 out of 222) in the Dewan Rakyat, the lower house of Parliament. Despite the State’s stronger assertion of its constitutional rights of late, both Federal and State Governments maintain a friendly relationship, especially in advancing development through Federal-funded projects in Sarawak. Given the State’s own substantial reserves, it is able to finance sizeable projects ahead of the receipt of grants and subsidies from the Federal Government, a position not achieved by many other states.

Balancing some of these strengths is Sarawak’s high dependence on commodities, with oil revenues constituting 22% of GDP and 70% of total revenue receipts. This exposes the State to the adverse effects of price shocks and output volatility, which if prolonged could impair its budgetary performance. Sarawak’s socio-economic development still lags that of peninsula states, especially in respect of household income level, infrastructure and industrial sophistication. We view favourably the ongoing initiatives to bridge the rural-urban development gap and in diversifying the State’s revenue base, but these will take time to gain traction. 

The sukuk programme will be used to fund 11 specific development projects throughout Sarawak, which may generate a multiplier effect over the longer term to support the State’s future revenues. The major projects among these include the Northern Coastal Highway (Limbang/Lawas road) and Kuching Urban Transportation System.


Analytical contact
Lynette Lee
(603) 3385 2621

Media contact
Padthma Subbiah
(603) 3385 2577

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