Brunei: Sure and steady

Brunei’s economy appears set for a period of consolidation and moderate if steady growth as the government combines careful management of energy resources with timely investments aimed at spurring expansion in the coming years.

According to the International Monetary Fund’s (IMF) latest world economic outlook, issued in early October, Brunei’s economy should expand by 0.5% this year, doubling this rate of growth in 2011, with moderate expansion continuing through to 2015, when gross domestic product (GDP) will increase by 1.5%.

Somewhat more optimistic is the Asian Development Bank (ADB), which is sticking to its forecast issued earlier this year and reviewed at the end of July for Brunei’s GDP to expand by 1.1% this year and 1.5% in 2011.

However, the 1.1% projection is down on the ADB’s estimate of 2.3% growth that was released at the end of 2009, which was based on higher prices for Brunei’s oil and gas exports.

Though Brunei’s expected growth rate is below that forecast for the region and the global economy, the relatively slow pace of GDP expansion has more to do with the measured developments being implemented to achieve longer-term stability than with any underlying weaknesses.

Over the past few years, Brunei has scaled back oil production, long the mainstay of its economy, in part to preserve existing reserves and also to allow essential upgrade work to be carried out on some of its main fields. The output is currently running at below 200,000 barrels per day (bpd), well below peak production of 260,000 bpd in the late 1970s.

To some degree, the reduction in oil production has been offset by an increase in natural gas output, with extraction now around 13.5bn cubic metres a year, with much of this exported to Japan. Natural gas’ contribution to the economy could be set to rise even further thanks to new reserves that have been identified in offshore blocks being developed by French firm Total and its local partners.

With the Brunei government promoting the development of downstream industries to feed off the Sultanate’s gas reserves, in particular the newly opened methanol processing plant at the Sungai Liang Industrial Park, the news of potentially massive offshore deposits will further reinforce confidence and encourage further industrial investments.

While the IMF and the ADB may disagree over the extent of economic growth Brunei can look forward to, both foresee similar levels of inflation for 2010 and beyond, with price rises in the Sultanate expected to be in the 1.5% to 1.8% bracket this year and the next, comfortably below the 2.7% in 2008 and in line with last year’s 1.8%.

Though the IMF and other agencies do not foresee the risk of an inflation breakout, due to the balance between supply and demand and the moderate projections for economic growth in the medium term, there is one potential factor that could impact domestic prices, possibly for both better and worse.

With dips in the value of the US dollar that have seen the local currency gain strength, the cost of some imported goods could well fall, though other internationally traded commodities that are priced in dollars could become more expensive. In particular, the cost of vehicles, grain and steel, all of which are usually priced in US dollars, could increase, though the price of many regionally produced food products could ease, experts say. The risk remains of a return of food price surges, as seen in recent years.

These surges, caused by shortages of some essential commodities such as rice or wheat, can add to inflationary pressures irrespective of what denomination is used to pay for them, especially in a country like Brunei what depends on imports for up to 80% of its food needs.

In addition, the falling US currency could have a negative impact in one important area of the economy, Brunei’s vital hydrocarbons export sector. Most of the Sultanate’s energy exports are dollar denominated, meaning any sharp fall in the US currency would result in a decline in revenue, which in turn would hit the state budget.

According to Pg Hjh Nirmala Pg Hj Mohammad, assistant director of planning at the Department of Economic Planning and Development, if the US dollar lost ground, it would necessitate belt tightening by the government.

“Depending on how much the US dollar weakens, by percentage, you can count that the national budget will also be amended by that percentage,” she said in an interview with the Brunei Times in mid-October.

Even with falls in energy revenues over the past few years, Brunei’s government has maintained spending levels in its budgets, with allocations for both the 2009–2010 and 2010–2011 financial year steady at $3.9bn. Backed by strong reserves built up over many years as a result of careful fiscal management, the state is well positioned to continue its investment programme to bolster the economy while also keeping in place the extensive social services network it has developed.

With the economy expected to gain momentum in the next few years, as state and private investments in industry come on line, Brunei can easily afford a period of slower growth, though it will want to ensure that this easing momentum does not become too fixed a pattern.