KUALA LUMPUR: S&P Global Ratings has affirmed its ‘A-’long-term issuer credit rating on the state of Sarawak, Malaysia, with a stable outlook.
The rating house also affirmed the ‘A-’ long-term issue ratings on Equisar International Inc.’s (EII) US$800mil guaranteed notes (due June 2026) and SSG Resources Ltd’s (SSG) US$800mil guaranteed notes (due October 2022).
The state is the ultimate owner of EII and SSG.
“The stable outlook reflects our expectation that Sarawak will continue to maintain its exceptional budgetary performance and liquidity,” it said in a statement.
The rating house said the upside to the rating was constrained by the sovereign rating.
“We could upgrade Sarawak if we raise the sovereign rating on Malaysia and Sarawak’s stand-alone credit profile also strengthened,” it said.
This, it said, could occur if the state’s revenue growth was higher than expectation, reducing tax-supported debt to less than 120% of operating revenue; and it reduces its state-owned enterprise (SOE) commercial project exposure, a contingent liability of the state.
“That said, we believe the state cannot be rated above the sovereign because it does not have greater operational and budget flexibility than the sovereign to deal with potential stresses,” it said.
S&P added that downward rating pressure would arise if the financial performance of Sarawak’s sector for SOEs deteriorates materially, weakening the government’s financial position and increasing debt.
“Additionally, we may lower the rating if Sarawak’s compensation in lieu of oil and gas rights is significantly lower than our expectation or its capital expenditure increases significantly, resulting in structural deficits after capital accounts.
“A lowering of the sovereign ratings would also result in a downgrade on the state,” it said.
Sarawak’s credit profile is supported by its large cash surpluses and growing reserves driven by oil sales, which strengthen its liquidity coverage.
These factors offset its weaker than international peers, and elevated debt levels and contingent liabilities.
The rating house also assessed the financial management of Sarawak as satisfactory, supported by the state government’s political and managerial strengths.
However, it said SOEs competing with the private sector for business raised the government’s exposure to risks, somewhat tempering the strengths.
“The recent transition in Sarawak’s top leadership was smooth, and the government kept policy direction and implementation capability largely stable.
“We project Sarawak’s capital expenditure to rise moderately this year and next, due to an increasing focus on narrowing the infrastructure gap between rural and urban areas, and driving the development of its digital economy initiative,” it said.
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