KUALA LUMPUR, Sept 24 — Moody’s Investors Service has changed the outlook on Sarawak’s rating to stable from negative.

In a statement today, it also affirmed the long-term issuer rating at A3, as well as affirming Sarawak’s Baseline Credit Assessment (BCA) at baa1.

The change in outlook to stable from negative reflects Moody’s assessment that the recovery in oil prices since the onset of the coronavirus shock, combined with the settlement of the dispute with Petroliam Nasional Bhd (Petronas, A2 stable), and the associated enhanced visibility over the collection of the state’s sales tax on petroleum products.

Moody’s said the latest development will provide Sarawak’s government with greater fiscal flexibility to maintain relatively high levels of development expenditure while keeping solid levels of financial buffers over the next few years, which is a key source of credit support.

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“Sarawak’s credit profile will be supported by the recovery in oil prices since the initial coronavirus shock as well as the enhanced visibility of the collection of its sales tax on petroleum products.

“In particular, these factors will allow the state government to maintain its relatively high levels of development expenditure while keeping the level of fiscal reserves solid as a buffer against future shocks,” it said.

Sarawak’s government derives around three-quarters of revenue from petroleum-related sources and contracts for the liquefied natural gas (LNG) that the state produces, which dominates its hydrocarbon production, is typically linked to Brent crude prices, Moody’s said.

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As such, oil prices around US$60-70 per barrel in 2021, which Moody’s assumes will be broadly maintained over the next two years, will provide a significant boost to the state’s finances.

In addition, Moody’s said the agreement that was reached with Petronas in the second half of 2020 to pay sales tax on petroleum products provides certainty over Sarawak’s state budgets and revenue sources.

“Notably, the payment by Petronas in 2020, which includes the settlement of its obligations in 2019, helped the state government eliminate its significant cash-financing shortfall despite the impact of the pandemic on oil prices and LNG sales.

“Moody’s estimates that the sales tax on petroleum products will account for an average of around 35 per cent of Sarawak’s revenue over the next few years, with Petronas accounting for the bulk of this revenue source,” it added. — Bernama