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Brunei Darussalam
Figure 1: Real GDP Growth (%)
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Growth momentum may be tempered in 2001.
The Eight National Development Plan, which was released in October,
is targeting annual average GDP growth of 5 to 6 percent per year in
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2001-2005. But growth for 2001 is likely to fall short of both this target
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and the 3.0 percent figure realized last year (Figure 1). This is to be
expected given the weakening global economy and the softening of
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world prices of oil and liquefied natural gas (LNG), the sultanate’s major
exports. The monthly average contract price of Brunei’s crude oil fell to
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1995 1996 1997 1998 1999 2000
Source: National Development
Committee, Eight National Development
Plan 2001-2005.
$20/barrel in October from its peak of $35/barrel a year ago (Figure 2).
World prices of LNG, the country’s other export pillar, have seen a similar
decline. In line with the falling oil prices, the country reduced average
oil production for the first six months of 2001 to 174 thousand barrels/
day, which is 6 percent lower compared to the same period last year
when oil and gas production reached record levels (Figure 3). With the
hydrocarbon sector accounting for 37 percent of Brunei’s GDP, lower oil
Figure 2: Brunei Contract
Crude Oil Prices ($/barrel)
and gas prices and production are likely to have a negative impact on
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output. In addition, weak export demand from Japan, Thailand, and
US are also expected to further dampen GDP growth this year, as these
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three economies accounted for 68 percent of the sultanate’s total
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exports in 2000.
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The budget surplus is threatened.
8
Apr
1997
Last year, fiscal prudence together with high oil prices enabled the
Apr
1998
Jun
1999
Seriah Light
Aug
2000
Oct
2001
Champion
Government to post a $1.2 billion surplus. This was a welcome change
from the chronic deficits that have plagued the economy in recent years.
This year, however, with plans to widen the tax base yet to be
Source: Bloomberg.
implemented and oil and gas prices falling sharply, the Government
may find it difficult to maintain this surplus. Measures being considered
to keep the budget balanced include reducing or adjusting privileges
given to civil service workers and requiring payment for utilization of
Figure 3: Oil and Natural
Gas Production per Day
Oil
some government services. Taxes to be levied on foreign workers,
numbering about 60,000 last year, are also being considered. On the
Natural Gas
200
10.5
190
10.0
180
9.5
170
9.0
160
8.5
150
8.0
140
1985
7.5
1990
1995
Oil (Thousand Barrels)
Natural Gas (Million Tons)
Source: Bloomberg.
2000
other hand, plans to reduce tariffs on vehicles from around 200 percent
to 15-20 percent next year will have a negative impact on government
revenues.
The weak private sector and high unemployment are still a concern.
The slump continues in the private sector, which has yet to recover
from the Asian financial crisis and the 1998 collapse of a large domestic
construction company, which at that time was the country’s largest
private employer. With falling oil prices squeezing government
revenues, government spending will be limited and this could mean
continued weakness for the private sector. Businesses are seeking a
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DARUSSALAM
hike in government spending to keep the economy moving and
themselves afloat. The Government, however, has reiterated that it is
not keen on handing out construction contracts to stimulate the economy.
Given all of these factors, it is not surprising that unemployment remains
a problem, estimated by official sources at somewhere between
5 and 6 percent. The problem is believed to be more acute for new
graduates, 25 percent of whom have not found jobs.
Initiatives to boost private sector growth and employment are
being undertaken.
The Government has embarked on various measures to address the
economy’s twin problems of continued private sector weakness and
high unemployment. In February, it launched a Br$2.2 million
government-paid apprenticeship training program in domestic firms for
university graduates and higher diploma holders. Response to the
program, however, has been poor, with only 340 out of the estimated
7,000 newly unemployed applying for the program. A second
government program involves a micro-credit financing scheme, carried
out in coordination with nine banks. Under this, university graduates
may borrow up to Br$30,000 in order to start their own business,
especially those in primary resources, construction, service, and infotech communications sectors. The response to this program has also
not been enthusiastic. Of the Br$30 million the fund has to offer, only
Br$4 million has been disbursed. Another government initiative involves
the passage of new regulations on investment, which seek to provide
clear and definite guidelines for granting pioneer status to industries
and give tax relief to foreign and local investors. Through these new
incentives, the Government hopes to increase job creation and hasten
commercial and industrial development.
Weakness in Singapore undermines Brunei’s currency.
The Brunei dollar, which is exchanged at par with Singapore’s currency,
Figure 4: Exchange Rate
Index (weekly average, last
week of 2000Dec=100, $/Br$)
has been weakening against the US dollar throughout most of 2001
(Figure 4). After a brief strengthening in August to early September, its
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value has dropped sharply since the 11 September attacks on the US.
100
10 September level. The current economic downturn in Singapore will
The US dollar value of Brunei’s currency is now 4.7 percent below its
undermine both the Singapore and Brunei dollar. Thus, weakness is
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likely to persist in those currencies, resulting in higher domestic prices
in Brunei, since the sultanate imports most of its food, building materials,
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clothing, and other daily necessities from abroad. On the other hand,
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29 Dec 09 Mar
2000
2001
01 Jun
2001
Source: ARIC Indicators.
24 Aug
2001
16 Nov
2001
the strong US dollar will have a positive impact on the country’s export
sector, enabling it to earn more Brunei dollars for its oil and gas exports,
which account for more than 80 percent of total exports.
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Economic diversification is a continuing thrust of the Government.
Services is one sector that the Government is pinning its hopes on to
achieve its goal of economic diversification. The tourism industry, in
particular, is being developed as a source of foreign exchange and
private sector employment, so the Government is spending $2.9 million
to actively promote this year as “Visit Brunei 2001.” Brunei has, likewise,
signed an open skies agreement with five countries in order to abolish
restrictions on flights, foreign investment, and airline marketing services
among them. These initiatives are timely since hotels in the country
have long been suffering from low occupancy rates (currently around
20-30 percent) since the Asian crisis. Unfortunately, tourist arrivals in
the country may have been negatively affected by the attacks in the
US. Travel agents have already reported a drop in bookings and
reservations to the country since 11 September.
The banking and financial institutions sector is another service subsector
that the Government is keen on developing. This sector contributes
about 80 percent to the non-oil and gas tax revenue. According to the
Government, regulations governing International Insurance and Takaful
Order (Islamic Insurance) are the only remaining legislation yet to be
implemented in order for Brunei to become a full fledged international
offshore banking center. The other three major areas of legislation, for
which laws have already been enacted, relate to the banking, securities,
and trust industries. All in all, 10 new laws were passed to make the
country’s business climate more attractive to foreign investors and
lenders. In addition, the creation of a domestic capital market is also
being considered. In this regard, the Government has plans to issue
bonds (denominated in Brunei and US dollars) of different maturities in
order to establish a yield curve for the country. But these plans for
repackaging Brunei as an international financial center may meet stiff
competition from already established rival centers in the region such
as Hong Kong, China; Singapore and Tokyo. The country, however,
may have found a niche with respect to providing Islamic financial
facilities and services. The Islamic Development Bank Infrastructure is
the first international financial group to set up an office in the sultanate,
while the Islamic Mutual Fund is the first mutual fund company to open
in the Brunei International Financial Centre.
More reforms are needed to promote foreign investment.
The Government still has to undertake various reforms to promote
foreign investment and economic diversification, while further laws are
needed to complement recently passed ones. For example, the inability
of private individuals to sue the Government is seen by some as a
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hindrance to the entry of foreign investors in the country. The absence
of timely and reliable economic and financial data is another problem,
since it prevents informed analyses of the country’s performance.
Remedying these will be important to attracting foreign investors and
competing with other offshore international financial centers that have
more transparent government policies in place.
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