Mega-projects and investment in non-enegy sectors to drive growth in Brunei Darussalam

A high-income country with vast petroleum wealth, robust fiscal reserves and a small, highly-educated population, Brunei Darussalam is unique among the ASEAN community. Oil and gas resources have generated high per-capita income, although the economy has contracted in recent years as a result of falling oil and gas prices, which account for more than 90% of export revenues. Although historically high energy prices and prudent policymaking have left the Sultanate well-positioned to weather short-term market shocks, productivity has been sluggish and the economy’s oil dependency is a concern for the government.

As such, Brunei Darussalam has launched a number of reforms in recent years aimed at attracting new foreign direct investment (FDI), supporting diversification into high-tech, agricultural and manufacturing industries, supporting small and medium-sized enterprises (SMEs), and encouraging private sector growth in a bid to reduce dependence on the public sector. Although the dual challenges of lower global oil prices and ongoing refurbishment of existing facilities has dampened the outlook for 2016, GDP growth is set to soar in the coming years as a number of new projects in the downstream sector come on-line, while ongoing diversification efforts could see trade and investment with China, the US and Pacific Rim countries expand significantly in the longer term.

Overview

Decades of sizeable surpluses have led Brunei Darussalam to become one of the wealthiest ASEAN members. According to World Bank data, the Sultanate is a high-income country with a population of 423,205 in 2015, and gross national income per capita of $36,607, while GDP per capita has risen from $12,785 in 1998 – during the 1997-98 Asian financial crisis – to $40,979 in 2014, the second-highest in the ASEAN Economic Community (AEC) after Singapore’s $56,285.

However, the country’s year-on-year GDP growth contracted 2.3% in 2014 and 0.6% in 2015, according to the Department of Economic Planning and Development (JPKE). The total estimated GDP stood at BN$17.8bn ($12.7bn) in 2015, compared to BN$21.7bn ($15.4bn) in 2014. Brunei Darussalam’s abundant foreign exchange reserves and robust portfolio of international investments – with an estimated as $40bn according to the Brunei Investment Agency – have given it ample room to withstand an economic downturn.

The Sultanate’s economy is dominated by, and dependent upon, its robust energy sector, with oil and gas revenues comprising 93% of export revenues in 2015, according to the JPKE. The oil and gas sector accounted for BN$10.1bn ($7.2bn), or 56.9% of total GDP at current prices in 2015, compared to the BN$13.9bn ($9.9bn), or 64%, the sector contributed in 2014. However, the price of crude on global markets tumbled from around $115 per barrel in June 2014 to less than $30 in January 2016, its lowest level in 12 years, and is forecast to remain subdued over the next three to four years, according to the IMF. Ongoing maintenance at existing oil production facilities has further dampened oil output in recent years (see Energy chapter).

Vision 2035

Although the country’s large asset base is capable of absorbing the near-term negative shocks, fiscal reforms and economic diversification remains major priorities for the government of His Majesty Sultan Haji Hassanal Bolkiah. Economic diversification is enshrined in the Wawasan Brunei 2035 economic development plan, which also aims to transform the country into a knowledge-based economy with one of the top-10 highest standards of living globally, as well as having one of the highest incomes per capita worldwide.

The strategy has identified key pillars to achieve these goals, which include establishing an education plan which will boost competitiveness and provide ample supply of highly-skilled human resources; promotion of FDI and domestic investment in the downstream oil and non-oil industries; development of a robust security strategy; institutional reforms to enhance good governance within the public and private sectors; development of a modern regulatory framework and reduction of red tape; and support for SME growth. The plan also envisions launching an infrastructure development strategy that will attract private investment through public-private partnerships, and emphasise education, industry and health care.

Mid-term planning is outlined in the Tenth National Development Plan running from 2012 to 2017. This is the second medium-term plan under Vision 2035, which emphasises accelerating economic growth, improving productivity and achieving average annual GDP growth of 6%.

Recent Growth

In its most recent Article IV Consultation for Brunei Darussalam, released in June 2015, the IMF reported that the country’s GDP contracted by roughly 1.5% in 2014 as a result of declining oil production, while the non-oil economy grew by 1.9% as a result of higher government expenditure. The current account surplus, although declining due to increased imports of capital goods for oil facility maintenance in addition to falling oil exports, remained at a sizeable 24% of GDP in 2014, according to the IMF, although its fiscal surplus simultaneously narrowed to 2% of GDP, again due to oil prices. Inflation held at 0% throughout 2014, in large part due to the Brunei Darussalam dollar being pegged to the Singapore dollar, which appreciated throughout 2014. This has had the adverse effect of driving up the cost of living and working in the Sultanate, despite the fact that Brunei Darussalam offers the second-lowest corporate income tax rate in the AEC at 18.5%, and does not charge personal income tax, or tax sole proprietorships or partnerships.

Oil Impact

The oil price plunge of 2014-16 has had a dramatic impact on growth, however, and in January 2016 Brunei Darussalam’s second finance minister, Pehin Dato Abd Rahman Ibrahim, told media that government earnings fell by 70% between the 2012/13 and 2015/16 fiscal years. The Ministry of Finance revealed that previous projections of a $2.28bn budget shortfall in 2015/16, announced in March 2015, would likely increase after Brunei Darussalam recorded a $1.6bn deficit during the first nine months of the fiscal year.

Although the country has been supported to some extent by signing long-term liquefied natural gas agreements with major trading partners Japan and South Korea, spot sales and short-term contracts are becoming increasingly common, with the Organisation of Petroleum Exporting Countries (OPEC) maintaining high oil and gas output, even as new production from the US and Iran is flooding the market, further augmenting the global oil glut.

Long-Term Energy Development

Brunei Darussalam, for its part, is in the midst of upgrading its oil production facilities, including construction of the $4.3bn Hengyi refinery set to be completed in 2018 (see Energy chapter), with the goal of boosting production and exports, while simultaneously diversifying into renewable energy and value-added downstream production.

In 2014 the government released its “Energy White Paper”, which aims to see the energy sector expand by 6% annually in real terms, from a GDP contribution of BN$10bn ($7.1bn) in 2010 to BN$42bn ($29.9bn) by 2035. To achieve this goal the paper has targeted attracting up to $80bn of new foreign investment over the next two decades in order to discover new reserves, boost production levels, and diversify into the downstream and renewable segments. Despite the drop in oil prices the government also remains determined to boost output, with the Energy and Industry Department of the Prime Minister’s Office announcing in July 2015 that it would continue with plans to increase oil and gas output by 20%, supported by Total’s recently-launched Maharaja Lela South (MLS) offshore oil and gas field, as well as upgrades to MLS’s onshore gas processing plant.

Fiscal Reforms

Although energy markets will almost certainly rebound over the next five years, Brunei Darussalam recorded a $213m deficit during the 2014/15 fiscal year, with fears of a deficit snowball leading the government to announce plans for fiscal reforms, fuel subsidy cuts and even the imposition of new sales taxes. Indeed, in January 2016 the Prime Minister’s Office announced plans to reduce government spending, with future outlays expected to emphasise activities which bolster economic growth and provide job opportunities to Bruneian citizens.

As highlighted by the IMF’s June 2015 Article IV Consultation, falling oil prices present the government with a prime opportunity to reduce generous fuel subsidies. These were estimated to have cost the government $470m in 2011, according to a report published by the Asian Development Bank, equating to over $1000 in subsidies per resident.

“The authorities should take advantage of the smaller gap between the retail price and the world price to formulate and initiate the implementation of a long-term strategy for fuel subsidy reform, similar to regional peers,” wrote the bank.

The idea had been floated before, with the government going as far as launching a “no subsidy” day in May 2010 for fuel prices, although the idea proved unpopular and was not repeated. Nonetheless, calls for fuel subsidy reforms have grown louder in the wake of falling oil prices, while the idea of introducing new taxes, including a government sales tax or value-added tax (VAT), was also floated in January 2016. In the oil-rich GCC, where oil revenues comprise the majority of government earnings, countries including Saudi Arabia and the UAE have already announced plans to roll out a VAT within the next few years.

Public Sector

The IMF has also recommended a public sector wage and hiring freeze, which would further improve fiscal savings in addition to encouraging private sector employment. Although the oil and gas sector is the largest economic contributor, the public and non-hydrocarbons private sector also play important economic roles.

Brunei Darussalam’s demographics are split into three main population groups, according to JPKE data. Bruneian native citizens – who are predominately Malay – comprised 72% of the population in 2014 and make up the majority of public service. Permanent residents – who are mostly Chinese immigrant citizens – comprised 7% of the population and generally dominate ownership and management of non-oil private enterprises. Lastly, temporary residents – who are predominantly foreign labourers sourced mainly from Indonesia and the Philippines – comprised 21% of the population in 2014 and make up the service sectors and some expatriate professionals concentrated in the petroleum and education sectors According to the OECD’s “Economic Outlook for South-east Asia, China and India 2016” report, the high concentration of economic activity in the oil and gas sector and in government has resulted in high unemployment. Furthermore, although the energy sector comprised roughly two-thirds of GDP in 2014, it only accounted for 3.3% of employment. While unemployment fell from 9.3% in 2011 to 6.9% in 2014, rising unemployment in the event of sustained low oil prices remains a concern, as does the size of the public sector. According to JPKE data, 27.3% of the workforce was employed in the services sector in 2014, which is dominated by public administration. Therefore, increasing the number of Bruneians working in the private sector remains a priority, and Wawasan Brunei 2035 emphasises job creation for locals, while the second minister of finance has also stated that budgetary reforms will support any activities that result in higher Bruneian employment in the public sector.

FDI Promotion

With this in mind, the government has unveiled a host of measures that aim to improve economic diversification, including supporting private sector and non-oil growth. A host of attractive investment incentives are on offer in “pioneer” industries which include innovative segments such as pharmaceuticals, health care, halal food processing and ICT (see Trade & Investment chapter). In addition to boosting economic activity, these initiatives are also having a knock-on social impact. “Brunei’s healthcare system has grown to a very modern stage, and is coupled with good-quality medical equipment and facilities. For instance, patients can benefit from a brand new cutting-edge stroke centre,” Jessica Lee, managing director of Asterix United Brunei, told OBG.

The government is also extending reforms to the SME segment, and in April 2016 the Prime Minister’s Office launched a new Business Support Centre for SMEs, which will facilitate and support local SMEs, as well as foreign investors hoping to establish small businesses in the Sultanate.

Recent regulatory reforms aimed at reducing barriers to starting a business have also had success. In the World Bank’s “Doing Business 2016” report, Brunei Darussalam ranked as one of the most-improved countries out of 189 surveyed on the ease of doing business index, and rose 17 spots from 101st to 84th after moving to launch a one-stop shop for low-risk businesses, which significantly reduced the amount of time it takes for retail and restaurant investors to begin operations. Although the Sultanate recorded the strongest gains in the “starting a business” and “paying taxes” categories on the ease of doing business index, it also witnessed significant improvement in the “getting credit” category, where it rose 11 spots to rank 79th (see analysis).

Banking & Capital Markets

Brunei Darussalam’s banking sector is well-capitalised and profitable, with the IMF reporting that non-performing loans declined through 2015, while lending growth reached 1% in 2014. The IMF praised Brunei Darussalam for strengthening its financial sector architecture through increased use of the Public Credit Bureau under the country’s central bank and market regulator, the Brunei Darussalam Monetary Authority (AMBD), and the launch of a national payments and settlements system.

In addition to its halal foods industry, the Sultanate is also hoping to develop new Islamic financial services and products, and has made promising headway in sukuk (Islamic bonds). In September 2015 the AMBD issued a $100m sukuk with a 91-day tenor, and in April 2016 the central bank made its 129th sukuk issuance, valued at $50m with a 364-day tenor. The AMBD issued more than $9.6bn worth of short-term sukuk between April 2006 and April 2016, bringing the total holdings of the Brunei Darussalam government in sukuk outstanding to $575m as of April, 2016.

Construction

According to the IMF, the non-oil sector expanded by 1.9% in 2014 as a result of construction growth, while JPKE reported that construction activity expanded considerably in 2015. Construction is the second-largest economic contributor in Brunei Darussalam’s industrial sector after oil and gas mining and manufacturing, and its total GDP contribution was BN$441.1m ($313.8m) in 2015, an increase from BN$425.5m ($302.7m) in 2014, according to the JPKE. Public infrastructure expenditure has offered a boost to the non-oil sector in recent years, particularly on two mega-projects that are planned, the Temburong Bridge and viaduct, and the Hengyi oil refinery and petrochemicals complex.

Temburong Bridge

The Temburong Bridge project, spanning 30 km, will cross the Bay of Brunei and connect Temburong to the Brunei-Muara district. The bridge will significantly improve commute times for travellers between the main body of Brunei Darussalam and its Temburong peninsula, enabling drivers to connect between the two without crossing through Limbang in Malaysia.

The $1.6bn project will be divided into six construction contract packages, reducing the current drive time of 1.5 hours to 20 minutes. It will consist of two navigational bridges – one running between Kota Batu and Tanjung Kerasek, and one stretching across the Eastern Channel. The viaduct will span 11.8 km between Tanjung Kerasek and Labu and include a smaller bridge crossing between Sungai Labu and a junction at Jalan Puni-Labu.

The project is under development through the Public Works Department, which awarded a construction contract for the “CC3” package – involving construction of the bridges – to a joint venture led by South Korea’s Daelim International and local partner Swee in September 2015. Contract “CC4” – for the viaduct construction – was awarded to a joint venture between China State Construction Engineering and Ocean Quarry & Construction in the same month. Construction for contract CC3 began in October 2015 and is expected to wrap up in February 2019. While contract CC4 aims to be completed by March 2019.

Hengyi

The Hengyi refinery, meanwhile, involves the construction of an integrated refinery and aromatics complex, located in Pulau Muara Besar. After reaching a leasing agreement with the Brunei Economic Development Board in April 2012, its developer, Chinese firm Zhejiang Hengyi Petrochemicals, received official approval in February 2013. The complex will span an area of 260 ha and will create between 800 to 1200 jobs when construction of the second phase finishes in 2019. Its first phase, which has been pushed from 2015 to late 2017 or early 2018, will enable production of 135,000 barrels per day of crude and condensates, 1.5m tonnes per annum (tpa) of diesel, 400,000 tpa of gasoline, 1m tpa of jet fuel, 1.5m tpa of naphtha cracker, 1.5m tpa of paraxylene and 500,000 tpa of benzene. This represents a critical next-step for Brunei Darussalam’s energy sector, with value-added petrochemical production expected to offset losses from declining production at mature fields, and depressed global oil and gas prices (see Energy chapter). According to media reports, construction for the full project will cost $4.32bn, of which $1.5bn will be provided by Zhejiang Hengyi and $2.82bn from bank loans, making it one of the largest overseas investments under development by a private Chinese firm.

Outlook

These projects, particularly the new refinery, will have a dramatic impact on future GDP growth, despite a subdued near-term forecast. The IMF reported that lower oil production and prices are expected to generate considerable fiscal and external deficits through to 2017, forecasting real GDP growth will recover to 2.9% in 2016, although long-term forecasts are much more positive.

The IMF reported that GDP growth will rebound at the beginning of 2018 as energy prices recover, maintenance on existing oil facilities finishes and the Hengyi refinery comes online. Total GDP is forecast to hit double-digit growth before 2020, rising to 3.4% in 2017, 6.7% in 2018 and 11.4% in 2019. The bank forecasts energy sector GDP will rise by 4% in 2016, 4.4% in 2017 and 2.9% in 2018, before jumping to 12.5% in 2019. Most promisingly, however, is that non-energy GDP is forecast to rise by 2.2% in 2016, 2.7% in 2017, 9.3% in 2018 and 10.7% in 2019. This puts the Sultanate on track to reaching its goals of economic diversification, and should see the construction, banking and manufacturing sectors flourish in the coming years.