[MARC] MARC Ratings affirms Terengganu’s sub-sovereign rating at AA-

MARC Ratings has affirmed Terengganu’s sub-sovereign credit rating at AA- with a stable outlook based on the rating agency’s sub-sovereign rating scale. The rating reflects Terengganu’s healthy fiscal position, supported by its low debt levels, and substantial oil and gas resources.

Terengganu has steadily reduced its debt, supported by the federal government’s strategic decision to partly utilise oil royalty payments to offset the state’s outstanding debt. Terengganu’s total debt has been below 1.0% of gross domestic product (GDP) since 2019. This reflects a significant reduction in the state’s debt level from 4.8% of GDP in 2010.

Terengganu remains a key hub for the downstream oil and gas industry, with its refined petroleum products making up 92.0% of its RM6.1 billion manufacturing exports in 2022. In 2023, Terengganu’s manufacturing share of GDP remained high at 36.9% compared to other oil-producing states (Sarawak: 26.5%, Sabah: 7.3%), highlighting the state’s focus on advanced downstream activities.

The rating is tempered by Terengganu’s reliance on oil-related revenue as oil royalties remain the primary source of the state’s revenue, averaging RM1.3 billion annually or 70.1% of total revenue over the 2018-2022 period. This poses a risk to Terengganu’s revenue base, which is dependent on global oil price fluctuations and the mechanisms of oil royalty distribution, compounded by limited economic diversification. Nonetheless, the state government’s ability to adjust its expenditure in response to revenue fluctuations has helped minimise the impact of external shocks.

Terengganu’s stable outlook reflects our expectations that the state government will continue to adopt conservative fiscal policies and receive support from the federal government for the state’s economic and social advancement, particularly infrastructure project implementations. Evidence of economic transformation that could widen its revenue base will strengthen Terengganu’s credit profile.

Augustinne Wong, +603-2717 2938/ augustinne@marc.com.my
Yassier Mohammed, +603-2717 2906/ yassier@marc.com.my
Dr Ray Choy, +603-2717 1770/ raychoy@marc.com.my