|
Brunei derives its wealth from an abundance of oil and gas resources. The brunei economy contracted 1.8% yoy in 2009 and is estimated to have grown over 1% in 2010, on the back of higher global commodity prices. The largest risk to sustainable growth is the oil dependency of the country. Economic policy is directed towards diversifying the economy and reducing the size of the public sector. The political and social situation is very stable as the ruling sultan lets the population live of the oil wealth. As such, the median income is high and unemployment low. Even so, the sultan sees the need to introduce a limited degree of democracy, but so far no real change has occured. The balance of payments and external position are in good shape due to substantial hydrocarbon exports.
Things to watch:
-
Diversification efforts of the economy
-
Volatility in global oil and gas prices
-
Government efforts to introduce a limited degree of democracy
Economic structure and growth
Brunei is a small country bordering the South China Sea and Malaysia. Brunei became a British protectorate in 1888 and almost a century later, in 1984, it gained independence. The country became a constitutional monarchy and is ruled by sultan Hassanal Bolkia Mu'izzaddin. Brunei is very prosperous as it enjoys a vast presence of oil and gas resources. It has a very low unemployment rate of 3.7% and it is one of the wealthiest countries in Asia, with a nominal GDP per capita of USD 50,300 in 2010. As the source of its wealth is its massive hydrocarbon resources, the industrial sector dominates the structure of the economy with 74%. The services sector follows with 25%, while the agricultural sector is negligible with 1%. Hydrocarbon production accounts for about 50% of GDP and 90% of exports and government revenue, which highlights that the economy is fully dominated by the oil and gas sector. The government plans to diversify into Islamic banking and the IT-sector. Even investing in the development of only two sectors will very much improve the country’s prospects, given the fact that the labour force is very small with 188,800. As it is now, the public sector employs the majority of the population. The government is further trying to privatize several public sector enterprises. However, progress is slow regarding economic diversification and privatization as the government takes a gradual approach. If no new oil and gas fields are found though, the country will run out of oil in 20-30 years, thus speeding up diversification progress is advisable.
Brunei does not maintain a regular schedule of economic data releases, and is notoriously late with any data releases. Contributing to the decline were lower global oil and gas prices, combined with 4.6% lower output in the hydrocarbon sector. The non-hydrocarbon sector expanded by 0.9%. While this is a good sign, it must be noted that the non-hydrocarbon sector, many of which is state linked, is financed ultimately by oil and gas revenues. This means Brunei is still a long way from achieving a more balanced economic structure. Domestic consumption grew in 2009. Private consumption rose by 4.7% and government consumption 5.3%. Exports fell by 5.3%, mostly as a result from lower oil production and lower global oil prices. Brunei’s main trading partners are other Asian countries such as Japan, Indonesia, Singapore and Malaysia.
Economic growth of 1-2% is estimated for 2010, but economic data is expected to be released by the Brunei government not before September 2011. For 2011, at least 2% GDP growth is expected. Mostly, as Brunei’s main trading partners have experienced an economic recovery, this has resulted in sustained external demand. Obviously, the level of global oil and gas prices in 2011 also plays a large role. In the longer term, the sustainability of economic growth depends on the success of the country’s diversification efforts.
Recent economic performance
Though Brunei enjoys one of the highest standards of living in Asia, its economic growth has not kept pace with population growth and its GDP has grown more slowly than ASEAN and global averages. GDP growth declined to 0.6 per cent in 2007 from 4.4 per cent in 2006, mainly on account of voluntary cutbacks in oil and gas production to prolong the life of the country’s hydrocarbon reserves. Previous growth had been largely driven by high global oil prices and strong demand from neighbouring Asian economies.
To date the global economic crisis has had limited impact on Brunei, mainly due to limited global exposure in its capital markets. Domestic banks are adequately capitalised and profitable. Banks are also highly liquid, with more than half of total deposits parked abroad. Further stability was provided by the Government’s October 2008 guarantee of all Brunei-dollar and foreign currency deposits till the end of 2010.
However, the fall in oil prices following the global economic crisis and subsequent decline in energy production saw Brunei’s GDP contract by 1.5 per cent in 2008. Forecasts for 2009 see a return to positive growth, due in part to more favourable external conditions and the large fiscal and current account surpluses built up through prudent Government policy in recent years.
Economic outlook
Brunei’s heavy dependence on the oil and gas sector means that its economy is highly vulnerable to fluctuations in oil and gas prices, which makes it difficult to predict long-term economic prospects. This dependence looks set to continue in the medium term.
While Brunei's oil and gas reserves were expected to last for at least the next two decades, the March 2009 settlement of an outstanding sea bed boundary dispute with Malaysia could eventually open the way to the development of substantial new oil and gas reserves
Political and social situation
The political situation is very stable in Brunei and no significant change is expected in the coming years, as the ruling family intends to maintain its hold on power and has not allowed any genuine opening of the political process. The country is ruled by sultan Hassanai Bolkiah Mu’zaddin since 1967. The sultan is very powerful as he has full executive power. He acts as the prime minister and also as defense and finance minister. The sultan’s strong grip on power has resulted in a high degree of political stability. He favors a moderate form of Islam and is very popular. While the legal system is based on British common law, for Muslims Shari’a law supplants civil law in some areas.
Despite the sultan’s absolute power and disproportionate amount of wealth, the social situation is stable. The government keeps the population content by providing free education up to university level, free social security, subsidizing housing and rice. Furthermore, no income tax is levied and the public sector is the favorite employer. To a certain extent, the entire population is living of the country’s oil wealth.
The sultan did announce in 2004 to shift from an absolute monarchy to a parliamentary democracy. To this end, the sultan revived the parliament, known as the legislative council. However, since then, no real change has occurred in the political scene. Plans were that 15 of the 45 member body would be directly elected but this has never come into fruition. The parliament remains incomplete with 30 government-appointed members. Even these members do not have any genuine legislative or scrutinizing abilities as requests from members for more details on government finances have been rejected out of hand in recent years. Slight risk is a growing disenchantment by the population of the extravagant lifestyle of the royal family. However, as the population also benefits significantly from the oil wealth and no real opposition has emerged, we expect the social and political situation to remain stable in the coming years.
Relations with Malaysia have improved last year. A border dispute concerning an oil and gas rich maritime area has been resolved, as the countries have agreed to engage in joint exploration of the area.
|
