RAM ranks Sarawak, four states as robust

RAM’s commentary – State Implicit Strength Enhances SOE Ratings – elaborates on the states’ credit fundamentals and explains our approach to rating different transactions involving Malaysian state governments.

KUCHING: RAM Ratings views the implicit strength of five Malaysian states – including – as robust, while placing two states each in the very strong and strong categories and ranking the remaining four states as adequate.

This is given wide differences between the states, ranging from their economic structures to financial management as well as institutional strengths and capacities.

The ratings agency in a statement yesterday said Sarawak, Selangor, Perak, Johor and Penang, that are in the robust category, generally feature favourable economic metrics, where diversification has led to growth resilience. Financial management is sound, with persistent operational surpluses and sizeable reserves.

On the other hand, states placed in the lowest category have significant development gaps and noticeable institutional shortcomings that result in large arrears in both revenue collection and debt repayment.

Such variations between the states are considered in RAM’s State Implicit Strength – the first of such publications on Malaysian states to meet market demand for financial and macroeconomic views on all 13 states.

“RAM’s State Implicit Strength reports expand on our States Data Scan which was released last year.

“The State Implicit Strength facilitates a better understanding of state credit fundamentals and represents how RAM ranks the ability of states to extend extraordinary support to state-owned entities and government-linked financial institutions,” said Esther Lai, RAM’s head of Sovereign Ratings in a statement yesterday.

RAM’s commentary – State Implicit Strength Enhances SOE Ratings – elaborates on the states’ credit fundamentals and explains our approach to rating different transactions involving Malaysian state governments.

In view of greater accountability and transparency, states as well as state-owned entities are likely to be more financially independent as transfers from government coffers to the broader public sector are tightened amid measures to strengthen their performance.

“In line with our thought leadership and market development initiatives since 1990, RAM’s latest innovation is a response to the growing interest in fund raising for state-related projects,” adds Foo Su Yin, the chief executive officer of RAM.

RAM ranks the implicit strength of states as robust, very strong, strong and adequate, depending on their respective economic and financial metrics as well as institutional settings.

Based on its rating framework, stronger state implicit strength and a higher likelihood of extraordinary support accords multiple notches of enhancement to the stand-alone credit strength of the state-owned entity.

Besides aiding debt arrangers in structuring fundraising exercises, the state implicit strength also supports the needs of other stakeholders with an interest in the financial health of states, their growth and economic structure.

Other key highlights in the report is that despite their varied economic profiles, Malaysian states generally report persistent deficits due to limited revenue-generating capacities.

“As a federation, majority of revenue and income sources are first assigned to the federal government before they are distributed in a pre-determined manner to the state governments according to the conditions stipulated in the Constitution,” detaileld the report.

“Sarawak followed by Sabah, have the highest revenue among Malaysian states as they enjoy greater flexibility in raising their own revenue which is further boosted by their abundant natural resources.

“However, dependence on commodity-based revenues resulted in declining revenues over the past few years. Sarawak’s sterling track record of fiscal surpluses turned red in 2016, while Sabah reported a marginal surplus in 2016 after a deficit in excess of RM200 billion the year before.”

Meanwhile, RAM observed that fiscal management varied across states and reflects the institutional capacities of state and local governments. Most states improved their revenue collection rate as the proportion of revenue arrears to total revenue declined from an average of 24.7 per cent in 2012 to 15.7 in 2016.

In terms of arrears in debt repayment, RAM saw that seven out of 13 states show deteriorating trends in line with persistent or widening deficits.

However, from a broader perspective, the trend also reflected the supportive intergovernmental relationship that states receive from federal government.

“State institutional practices relating to audit by the National Audit Department is generally viewed in positive light – seven states achieved full compliance for submission of financial statements within the stipulated time by various state agencies and statutory bodies, while the lowest compliance rate among states was 79.3 per cent for 2016,” it said.

“The percentage of audited financial states that received unqualified reports from National Audit Department is also satisfactory. Sarawak, Negeri Sembilan, Kelantan and Johor received unqualified reports for all audited statements in 2016.

“Broadly, institutional settings of states are satisfactory but with room for improvement.”

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Source: Borneo Post Online

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