MARC Ratings has affirmed Sarawak’s sub-sovereign credit rating at AAA with a stable outlook, based on its sub-sovereign rating scale. The rating reflects Sarawak’s substantial fiscal buffers, persistent fiscal surpluses, and strong political representation.

As of 2023, Sarawak’s consolidated funds (cash and investments) stood at RM26.9 billion, equivalent to 14.8% of the state’s gross domestic product (GDP). This financial strength, supported by the state’s natural resource wealth, enhanced taxation authority, and sturdy investment income, positions Sarawak among the most fiscally resilient sub-sovereigns in Malaysia. The state’s consolidated funds cover its outstanding debt by 14.5x, highlighting its strong debt-service capacity and liquidity position.

Since 2019, East Malaysian states implemented sales tax on petroleum products, aligning with the oil and gas (O&G) sector’s pivotal role in Sarawak’s economic and fiscal performance. In 2023, the tax on petroleum and liquified natural gas (LNG) contributed to almost a third of total revenue. Sarawak holds more than half of Malaysia’s gas reserves, as the primary producer and exporter of the country’s LNG.

Consequently, given the significant role of the O&G sector in Sarawak’s economy, energy price volatility remains a major influence on the state’s fiscal revenues. As such, Sarawak is working to diversify its economy by expanding into manufacturing industries such as hydrogen, minerals, and metals, while also introducing new export taxes. However, these efforts remain in the early stages.

Sarawak benefits from a favourable institutional framework under the Malaysia Agreement 1963 (MA63), granting it greater control over taxation and fiscal management. This allows the state to introduce new taxes, borrow externally, and sustain financial flexibility. Moreover, Sarawak’s political representation is strong, characterised by it holding the most parliamentary seats and having representation in both ministerial and deputy prime ministerial portfolios.

Sarawak continues to develop economically, and hence, addressing socioeconomic disparities remains an important agenda. Sarawak’s median household income is below the national median, and while income inequality remains high, it has improved over time. The state government’s continued efforts to integrate rural development with economic corridor projects are expected to gradually narrow these gaps.

The stable outlook reflects our expectation that Sarawak will maintain strong fiscal management and financial buffers, supported by sustained O&G production, an expanding revenue base, and continued federal government support for the state’s development plans. However, Sarawak’s credit profile remains sensitive to global economic conditions due to its link with energy price fluctuations, which could materially impact the state’s key revenue sources.