Sydney, March 08, 2012 -- Moody's Investors Service has upgraded the State of Sarawak's issuer rating
to A3 from Baa1. The rating outlook is stable.
The rating action completes a review for upgrade of the state, which
is in Eastern Malaysia, initiated on November 29, 2011.
RATINGS RATIONALE
The upgrade is supported by Sarawak's strong record of positive financial
performance, including the generation of operating and financing
surpluses over many consecutive years, which have contributed to
the state's growing reserve levels.
Such results reflect, in turn, robust growth in commodities-related
revenues and the state's prudent approach to fiscal management,
which includes conservative budget projections and tight control over
stable and predictable operating expenditures. Financing surpluses
averaged nearly 30% of operating revenues from 2004 through 2011,
and were in excess of 20% in most of those years.
The review focused on Sarawak's strategy for debt management,
sinking-fund arrangements and future borrowing plans, and
concluded that the state retains a coherent strategy consistent with the
A3 rating. Principally, the setting aside of sufficient assets
to retire its large amount of foreign currency debt at maturity,
as well as the strategy of continuing to build reserves and utilizing
caution with respect to additional borrowings all support the rating upgrade.
Sarawak's rating also incorporates the state's sizeable and rising debt
burden, due largely to its assumption of contingent liabilities
related to its ownership of a non-profitable semi-conductor
plant in earlier years and, more recently, due to large planned
investments in infrastructure.
The state's debt burden is estimated to have reached 111% of revenues
in 2011, similar to its 113% level registered in the prior
year, as a large program of borrowing--undertaken
to attract industrial activity to a newly developed energy corridor known
as the Sarawak Corridor of Renewable Energy or SCORE—was offset
by growth in revenues and sinking funds. Moody's projects,
however, that debt to revenue could rise significantly in 2012 if
Sarawak proceeds with additional planned borrowings.
While this level of indebtedness is comparatively high on an international
basis, the state maintains substantial liquid reserves which provide
an important financial cushion in support of its elevated debt load.
Moody's notes that Sarawak's reserves have grown steadily in recent
years, amounting to an estimated 186% of total direct and
indirect debt in 2011. Such coverage could decline in 2012 if the
state proceeds with additional borrowing, but will remain well in
excess of the stock of debt outstanding. Furthermore, its
reserves are conservatively invested in cash and short-term instruments
held at a wide variety of Malaysian financial institutions.
Sarawak is Malaysia's fourth largest state in terms of population,
with 2.5 million inhabitants and the largest in terms of land area.
Its economy derives strength from its rich resource base, which
includes oil and gas extraction, forestry, and the production
of crude palm oil. Tourism also contributes to economic growth.
Moody's has also revised the issuer rating assigned to SGOS Capital Holdings
Sdn. Bhd. and debt rating assigned to Sarawak International
Incorporated's bonds (guaranteed by SGOS) to A3 with stable outlooks from
Baa1, under review for upgrade. The ratings reflect Sarawak's
funding relationship with these state-owned corporations,
which act as conduits for state-financing activities.
What Could Change the Rating UP/Down
An upward revision to the rating is unlikely, given that at A3,
the rating is now equivalent to Malaysia's rating. Moody's
does not believe that the state's rating is likely to exceed that of the
sovereign.
Should there be a loosening in the state's prudent management policies
resulting in a substantial reduction in reserves or significant further
accumulation of debt, the state's credit quality could be
adversely affected.
The methodologies used in this rating were Regional and Local Governments
Outside the US published in May 2008, and The Application of Joint-Default
Analysis to Regional and Local Governments published in December 2008.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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Debra Roane
VP - Senior Credit Officer
Sub-sovereign Group
Moody's Investors Service Pty. Ltd.
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Moody's Upgrades the Malaysian State of Sarawak's Rating to A3
