Fiscal wake-up call for Brunei Darussalam

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Amid concerns that Brunei Darussalam’s budget deficit could exceed earlier forecasts, Pehin Dato Abd Rahman Ibrahim, the second minister of finance, delivered a precautionary speech in January, emphasising the importance of public spending cuts.

Like many energy producers, Brunei Darussalam is feeling the pressure of falling oil and gas prices, having traditionally depended on hydrocarbons earnings to finance its budgetary spending.

“With heavy reliance on oil and gas, which accounts for 90% of the government’s revenue, the sinking global oil and gas prices have significantly affected the government’s income,” Pehin Dato Abd Rahman Ibrahim told local media in late January. Government revenues are down by around 70% compared to FY 2012/13, he noted.

In addition to spending cuts, substantial overseas investments are expected to cushion the impact of lower revenues, though the minister warned the deficit could spiral further if energy prices continue to fall.

Revised deficit projections

Brunei Darussalam’s deficit, which is projected to reach BN$2.28bn ($1.6bn) in FY 2015/16, totalled BN$1.6bn ($1.2bn) as of December 2015, according to Pehin Dato Abd Rahman Ibrahim, three months ahead of the end of the fiscal year.

By the end of the period, the deficit could rise as high as BN$2.3bn ($1.7bn), he added. This is equivalent to over 10% of GDP and represents a more than 10-fold increase over the BN$213m ($153.2m) deficit recorded in FY 2014/15.

The urgency of curbing spending has been underscored by further easing of prices in early 2016, with Brent crude dipping below $30 per barrel in January.

Spending levers

As the primary employer and main engine of economic activity in the Sultanate, the government faces difficult decisions when looking for ways to rein in expenditures.

In his speech Pehin Dato Abd Rahman Ibrahim pointed to measures taken by other oil-producing countries that have been forced to tighten spending.

While there was no explicit indication that actions such as the introduction of a goods and services tax or a reduction in subsidies on petrol, energy or food were being considered, their mention alone is likely to resonate with Bruneians.

Another possible measure that has been suggested by entrepreneurs and government officials is a “Buy Bruneian” campaign, encouraging nationals to spend locally rather than shop abroad as a means of stimulating the economy. A weaker Malaysian ringgit, which lost 18.6% of its value against the US dollar in 2015, had encouraged many Bruneians to source cheaper goods from neighbouring Malaysia.

Role for reserves

While the government weighs potential fiscal adjustments, the Sultanate should be able to ride out short-term constraints thanks to its major reserves and low public debt levels, which stood at 3.17% of GDP in 2015 – among the lowest in the world.

The IMF echoed this sentiment in its latest Article IV consultation, published in June 2015: “Financial savings should be used to finance near-term fiscal and external deficits, while undertaking a multi-year programme to [increase] efficiency in public spending, tackle price and wage distortions, and promote growth in the non-energy economy.”

While the activities of the Brunei Investment Agency, which manages the country’s sovereign wealth fund (SWF), are not made public, they have long provided the country with significant investment income and stability.

According to the SWF Institute, a US-based group that analyses public asset owners, the fund may have as much as $40bn in reserve, which could provide much-needed fiscal breathing room while the Sultanate pursues more long-term adjustments.

Ease of doing business

While Brunei Darussalam appears better placed than many of its oil-producing peers to accommodate a growing deficit, the government has made it clear that its citizens will still need to prepare for change, with the private sector slated to become a greater source of employment and GDP growth.

There are some early signs that a shift in the balance is already under way, supported by government efforts to improve the ease of doing business in the Sultanate.

In the World Bank’s “Doing Business 2016” report, Brunei Darussalam’s ranking rose by 21 places to reach 84th of 189 countries, driven by improvements to procedures for starting a business; the Sultanate had ranked 181st in the starting a business category in the 2015 report, but rose to 74th place thanks to a more streamlined online registration process.

According to Pehin Dato Abd Rahman Ibrahim, the number of new companies that registered online rose by nearly 20% between 2014 and 2015 to reach 568. The government’s business start-up schemes have also helped, the minister added, with the development of a more business-friendly environment, a top priority of the Sultanate’s long-term development plan, Wawasan Brunei 2035.

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