\"The ratings on the State of Sarawak reflect its strong operating balances, robust liquidity reserves, and its supportive relationship with the federal government of Malaysia,\" said Standard & Poor\'s credit analyst Yee Farn Phua. \"These strengths are weighted against a hefty debt burden and, to a lesser extent, an undiversified economy.\"

Sarawak\'s budgetary performance is expected to be strong from 2007 onwards. Sarawak is a resource-rich state and, in part because of this, the state\'s operating performance has been exceptional with large operating surpluses averaging 62% of revenue over 2002-2006. However the state\'s balances after capital expenditure have been volatile, due to large bond issuances to fund development projects. This volatility is expected to subside from 2007 onwards, as the state does not plan any commercially-funded development projects in the medium term.

The state\'s overall liquidity position is very strong, with cash and extra short-term liquidity amounting to Malaysian ringgit (MYR) 7 billion at year-end 2006. This is expected to cover on average 650% of annual operating expenditure from 2007-2009, and should provide Sarawak with the capacity to comfortably face any potential fiscal shocks. In addition, though the state\'s U.S. dollar debts are unhedged, its comfortable liquidity position should mitigate exposure risks.

The ratings on the state are constrained by a high tax-supported debt burden. A large portion of these debts was accumulated through the state\'s support of 1st Silicon. The state\'s gross tax-supported debt burden is forecast to be 225% of operating revenues in 2007, substantially higher than similarly rated peers. However, Sarawak\'s fast accumulation of reserves is expected to bring down its net tax-supported debt from 100% of total revenues in 2006, to a more manageable 68% by year-end 2007 and 10% in 2009.

The state\'s economy is dominated by the resources sector, which makes up about half of Sarawak\'s GDP. This concentration could negatively affect Sarawak should there be a sudden downturn in commodities prices or a slowdown in global demands. However, Standard & Poor\'s does not expect this to happen in the medium term.

\"The stable outlook on the state reflects our expectation that it will demonstrate strong operating performances and careful debt management in the medium term, with debt levels peaking in 2006,\" said Mr. Phua. \"The state is expected to reduce its net tax-supported debt to as low as one-third of its present level by 2009. However, the inability of the state to bring down its present debt levels in line with such expectations could see the ratings on the state come under pressure.\"