Bangkok--30 Jul--Moody's
Moody's has revised the outlook on the State of Sarawak's Baa1 issuer rating and the Baa1 ratings of its state-related companies (SGOS Capital Holdings Sdn. Bhd. and Sarawak International
Incorporated) to positive from stable to reflect the state's success in building and maintaining sizeable reserves and sinking funds which significantly mitigate the Malaysian state's high debt burden. In addition, the stock of debt outstanding of state-related companies is expected to decline considerably later this year as debt matures.
"The Baa1 ratings and positive outlook are supported by Sarawak's strong record of positive financial performance, with operating and financing surpluses generated over many consecutive years and contributing to growing reserve levels," said Moody's Vice President Debra Roane.
Financing surpluses have averaged 24% of operating revenues from 2002 through 2008 and in excess of 20% in every year beginning in 2004.
"Positive results in recent years reflect robust growth in commodity-related revenues and the state's prudent fiscal management, which includes conservative budget projections and tight control over stable and predictable operating expenditures." These features are important, said the analyst, given high revenue volatility and a heavy debt service burden that reduces budgetary flexibility.
"Budgetary outcomes nevertheless remain exposed to volatility in commodity prices and the economic performance of the state's trading partners given Sarawak's reliance for the bulk of revenues on oil, gas, palm oil and timber prices and production," said Roane. "The state has forecast a minor deficit in 2009 to reflect the impact of an expected decline in commodity prices on revenues."
Sarawak has a relatively high debt burden, a result of assumption of the debt of 1st Silicon by state-related companies as part of a merger agreement that reduced its ownership stake in the unprofitable semiconductor manufacturer from 100% to 35% in September 2006. The reduced ownership effectively eliminated Sarawak's further exposure to the company and relieves the state of pressures to provide equity injections in the future. The state's liabilities also include debt obligations of other state-owned companies issued for the purpose of building state infrastructure and other economic development investments.
"The stock of debt of the state-related financial companies declined in 2008 and will show a sharp drop-off in 2009 due to scheduled large debt maturities," said Roane. "Significant improvements in the net debt position reflect lower debt levels and increases in the state's sinking funds."
She said the state's substantial liquid reserves provide an important, additional financial cushion in support of the debt load. Reserves have grown steadily in recent years, reaching RM8.7 billion in 2007 and estimated to amount to RM12.1 billion in 2008.
Sarawak is Malaysia's third largest state in terms of population, with 2.3 million inhabitants and the largest in terms of land area. The economy derives strength from its rich resource base including oil and gas extraction, forestry and production of crude palm oil. Tourism activity also contributes to economic growth.
"Sarawak's economy is expected to slow in the wake of the global economic crisis largely due to its exposure to commodity prices and exports, but the economic impact is expected to be less severe in the state than in the nation as a whole because of the state's minimal reliance on electronics and the absence of financial service activities which have been hit hard in western Malaysia," said Roane.
Of importance to rating actions over the next 12 to 18 months is the sustainability of the debt reduction trend and the ability of the state to manage budgetary pressures stemming from the global crisis and weaker commodity prices.
Moody's Baa1 issuer rating, assigned to SGOS Capital Holdings Sdn., and Baa1 debt rating, assigned to Sarawak International Incorporated's bonds (guaranteed by SGOS), reflect Sarawak's close oversight and funding relationship with these state-owned corporations, which act as a conduit for state economic development and financing activities.
The principal methodologies used in rating Sarawak and its companies were "Regional and Local Governments Outside the US", "The Application of Joint Default Analysis to Regional and Local Governments", and "The Application of Joint Default Analysis to Government Related Issuers" which can be found at www.moodys.com in the Credit Policy and Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating Sarawak and its related companies can also be found in the Credit Policy & Methodologies directory.
The last rating action was on March 13, 2005 when Moody's upgraded Sarawak and its related companies ratings to Baa1 from Baa3.
London
Yves Lemay
Managing Director
International Public Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
New York
Debra Roane
VP - Senior Credit Officer
International Public Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653