KUALA LUMPUR (Aug 28): Moody’s Ratings has reaffirmed Sarawak’s A3 rating to have a stable outlook, despite a changing climate weighing down the state’s exposure to environmental risks.

The rating agency also affirmed the state’s baseline credit assessment at Baa1, corresponding to an assessment of a moderate likelihood of extraordinary support from the government of Malaysia.

“The rating affirmation and stable outlook are driven by Sarawak's sustained credit strengths, including a robust balance sheet characterised by sizeable fiscal reserves in excess of the state's net direct and indirect debt (NDID), as well as the state government's track record of prudent fiscal policies that contribute to its resilience to structural credit challenges,” Moody’s said in a statement. 

“We expect Sarawak's fiscal reserves to be stable and grow modestly under our current assumptions of healthy commodity prices over the next few years, remaining sufficient to cover all of NDID for the foreseeable future.” At present, Sarawak’s credit profile is in balance with its structural net cash position, wherein its fiscal reserves exceed its moderately high debt burden.

Meanwhile, the state’s operating margin has remained stable at 60%, with the margin sustained at said level since 2022.

Despite the tailwinds, Moody’s warned that Sarawak’s resource-based economy makes it particularly susceptible to environmental risk and future carbon transitions.

“The hydrocarbon sector, which is dominated by the production of natural gas, accounts for a majority of total state revenue and the bulk of exports. Although liquefied natural gas is an important carbon transition fuel, contracts tend to be linked to global oil prices and pose some volatility to revenue and broader state finances.”

“Meanwhile, the production of crude palm oil and logging activity contribute to the state's exposure to physical climate risks and the management of the state's natural capital,” the agency further said.

Moody’s has additionally noted that a rating upgrade would be unlikely, as Sarawak would not be allowed for a higher rating than that of the government of Malaysia (A3 stable). However, a rating downgrade is possible if the state government were to significantly deviate from its prudent fiscal management policy, such as through persistently wide cash-financing deficits, a sharp drawdown of fiscal reserves, or a further, sizable increase in net direct and indirect debt.

The agency has also noted that an increase in systemic risk, reflected in a downgrade to the sovereign's debt rating, would also place downward pressure on the state's rating, considering the high level of integration between the state and the sovereign government.