MARC Ratings has affirmed Sabah’s sub-sovereign credit rating of AAA with a stable outlook, based on its sub-sovereign rating scale.  

The rating reflects, to a significant extent, Sabah’s natural resource wealth, with the agricultural and mining sectors collectively accounting for 38.5% of the state’s gross domestic product (GDP) in 2023, the highest among all states. Sabah remained the top palm oil–producing state, contributing to 23.8% of national production in 2023 with almost two-thirds of the state’s exports relying on palm oil production. Moreover, Sabah contributed to 44.7% and 8.5% of Malaysia’s crude petroleum and natural gas production in 2020. Sabah’s development blueprints for advancing oil and gas downstream industries, supported by integration with infrastructure projects, would further develop its manufacturing industry. However, Sabah’s manufacturing share of GDP remains low at 7.0% compared to other oil-producing states (Sarawak: 28.0%, Terengganu: 37.6%).

Sabah has a strong revenue base, amounting to RM6.9 billion and constituting 5.7% of GDP in 2022 (peer median: 2.1% of GDP). Following the 2020 High Court verdict, which permitted Sabah to impose new sales taxes on petroleum products, Sabah’s tax revenue has more than tripled to RM3.8 billion in 2022 from RM1.2 billion in 2020. Sabah has made headway in improving the oil and gas revenue-sharing structure through multiple commercial agreements which provide the state higher control over this industry. 

Sabah’s fiscal surpluses have led to accumulated buffers against liquidity shortfalls, thus enhancing the state’s ability to service debt. In 2022, the state’s consolidated funds — made up of cash and investment balances — had exceeded total debt by 2x (2021: 1.3x), higher than its peers’ median of 1.0x. Sabah’s consolidated funds reached RM5.4 billion in 2022, ranking second among all states, just behind Sarawak. The state government had fully redeemed RM1.0 billion worth of bonds upon their maturity in December 2019, while Sabah’s debt position continued to improve as its debt-to-GDP declined to 2.2% in 2022 from 2.6% in 2021.

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 is entitled to a special allocation under the Federal Constitution, which mandates the federal government to return 40% of the net federal revenue collected from Sabah back to the state. While negotiations on the grant amount have commenced, Sabah will likely only receive the grant after the federal government’s fiscal account has strengthened. Furthermore, it remains to be seen if the full 40% of net federal revenue collected from Sabah will be returned by the federal government.

The key moderating factor to the state’s rating is its heavy reliance on commodities and limited progress on economic diversification. Sabah’s economic growth in the primary sector remains vulnerable to fluctuations in commodity prices and production. Factors such as adverse weather conditions, under-fertilisation, labour shortages, and stringent operating standards have led to stagnation in palm oil production since its peak in 2014. Similarly, Sabah's revenue is projected to decline by 10.6% in 2024, influenced by weaker external demand and lower commodity prices. Despite growth in the services sector, continued volatility in overall growth could hinder development projects and hamper Sabah’s ability to narrow socioeconomic gaps.

However, 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 revenue base in line with MA63, and federal government support for Sabah’s development blueprint due to its strategic political importance. Conversely, the credit rating could be negatively affected if the global economic upturn is delayed, denting commodity prices, which could dampen consumer confidence and slow Sabah's economic growth.