MARC Ratings has affirmed Sabah’s sub-sovereign credit rating at AAA with a stable outlook based on the rating agency’s sub-sovereign rating scale. The AAA rating reflects Sabah’s substantial fiscal buffers, high revenue base from its abundant natural resources and strong institutional framework.

Sabah’s fiscal surpluses have led to consolidated funds reaching RM5.4 billion in 2022 (2021: RM3.4 billion), exceeding the state’s total debt by 2x (2021: 1.6x). Sabah also has a solid revenue base, amounting to RM6.9 billion and constituting 5.7% of gross domestic product (GDP) in 2022 (peer median: 1.1% of GDP). Sabah’s natural resource wealth, being among the top state producers of palm oil and petroleum, has been a significant revenue source for the state, particularly following the 2020 High Court verdict that permitted Sabah to impose new sales taxes on petroleum products. The expanded tax base is expected to sustain Sabah’s revenue and consolidated funds, with the tax revenue having risen to RM3.8 billion in 2022 from RM1.2 billion in 2020.

The state’s credit strengths are moderated by its limited progress in economic diversification. Sabah’s manufacturing share of GDP remains low at 7.4% compared to other oil-producing states (Sarawak: 28.0%, Terengganu: 37.7%). Given the heavy reliance on commodity exports, Sabah’s economic growth and fiscal position remain vulnerable to fluctuations in commodity prices and production. Sabah’s GDP grew by 1.3% in 2023 (2022: 3.7%), with a 4.5% expansion (2022: 8.5%) in the services sector offsetting a 2.9% contraction (2022: -0.3%) in the agricultural and mining sectors. In the medium term, the sustained rebound in tourist arrivals is anticipated to mitigate the impact of weaker external demand and lower commodity prices.

Negotiations for the implementation of the Malaysia Agreement 1963 (MA63) have been underway since the bill to amend certain clauses within the Federal Constitution pursuant to MA63 was passed in 2021. These pertain to certain state rights and some degree of autonomy concerning its institutions and federal-state financial arrangements.

Sabah’s stable rating outlook reflects expectations that the state will maintain a strong fiscal position and healthy liquidity buffers. Factors supporting this outlook include sustained production of crude oil and crude palm oil, anticipated improvement in the state’s revenue base, and federal government support for Sabah’s development blueprint due to its strategic national importance.