Following market consultation, MARC has finalised and released its updated methodology for rating Malaysian state governments. The methodology sets out MARC's approach to assigning state credit ratings and provides insights into the factors taken into consideration.

The methodology substantially updates the rating analytical framework with the introduction of an adjustment factor to reflect the propensity of federal government support, including the likelihood and timeliness of extraordinary financial support for states facing financial distress.

We think that federal support has become an increasingly important credit factor given the current environment of rising volatility, uncertainty, complexity and ambiguity. We also think that a higher propensity of support is necessary to ensure the achievement of the federal government's Shared Prosperity Vision 2030.

The updated methodology now explicitly mentions the fact that both Sabah and Sarawak enjoy some degree of self-autonomy – a strong credit support that Peninsular states do not enjoy – under the Malaysia Agreement 1963. In addition, it also now takes into consideration sustainability issues.

While no formal responses to the consultation were received, there was generally supportive informal feedback on the proposed updated methodology. In finalising the update, MARC did not make any material changes to the content of the exposure draft.

The updated rating methodology can be accessed on MARC's website at Updated Rating Malaysian State Governments.

Contacts:
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my