16 Dec 2010
Paulius Kuncinas, OBG Regional Editor, Asia, at the launch of The Report: Brunei Darussalam 2010 on December 16, 2010, at the Empire Hotel, Jerudong, Grand Hall.
Good Morning Ladies and Gentlemen, Esteemed guests, Members of Media. It gives me a great pleasure to welcome you here today to launch the Report: Brunei Darussalam 2010.
As some of you know this is our fourth year of continuous editorial coverage on Brunei, which I have had the personal pleasure and privilege of overseeing.
Coming here every year as we did has helped us to build a conviction case on Brunei as an attractive investment destination. We have also been able to benchmark its annual progress in diversifying the economy and encouraging private sector growth.
We can confidently say that Brunei continues to advance in the right direction to meet the broad vision set out in Wasawan 2035 even though admittedly the transformation of domestic economy still faces a number of challenges.
2010 was a momentous year for Brunei and global economy which looks to be finally emerging from one of the worst post-war economic crises.
As we have argued many times before in our editorial – Brunei Darussalam was fortunate to have been sheltered from direct impact of global crisis thanks to prudent fiscal policy and stable government sector.
Authorities acted decisively to prevent a build up in credit bubble in its domestic financial sector, while making serious efforts to strengthen a culture of savings and fiscal prudence.
With stabilization in oil price outlook in 2010 we believe Brunei can once again move from defensive to a more proactive development strategy with an acceleration in government-backed projects.
The spotlight this year has been on diversification into petrochemicals sector and sharia-compliant food processing.
The opening of Brunei Methanol Plant and international efforts to establish Brunei Halal brand are two of the key milestones that we think will help to transform the structure of domestic economy.
To be sure, Brunei remains heavily reliant on government sector and hydrocarbon production. Fluctuations in oil prices caused a temporary setback at the end of 2009 with GDP trending lower as a result.
However, we are encouraged to find that the non-energy growth remained steady throughout the period with domestic consumption holding up relatively well against a challenging global backdrop.
According to official estimates the non-oil sector expanded by 0.9% in 2009 and we are estimating it will post a 1% growth in 2010.
To a large extent further expansion in economic activity will depend on timely implementation of government infrastructure projects. Specifically we are monitoring progress of landmark investment plans such as construction of new housing, waste management facility and a new water dam in Ulu Tutong.
The refurbishment of Brunei’s international airport will also be a positive driver in construction during this investment-led growth with phase.
Meanwhile, the completion of masterplan for Pulau Muara Besar (PMB) logistics and industry project bodes well for another strategic project to be launched in the near term.
The challenge we see is to ensure that Bruneian companies capture maximum value from these projects as subcontractors and benefit from technology and skill transfer from foreign contractors.
Although a more positive global growth picture may encourage Bruneian authorities to step up their public investment efforts we expect the authorities to remain fiscally prudent in their bid to ensure financial stability in the country.
From debt metrics and fiscal balance point of view Brunei is currently the most stable sovereign nation in the world. This is competitive advantage it quite rightly does not want to squander.
One of the key lessons that can be drawn from the latest global credit crisis is that when liquidity dries up balance sheet strength and national reserves is all that countries can fall back upon.
Dependence on capital markets and foreign investors exposes countries to high social and economic risk. We are pleased to say that in this regard Brunei continues to be a sweet spot for investors looking for an ultimate macroeconomic safe haven.
However there has been some warranted concern about the build-up in private household credit which necessitated policy response.
Oxford Business Group welcomes the government’s decision earlier this year to restrict customers to just one credit card linked to their salary. Given a low savings rate and propensity to consume there was a danger of households being unable to service their debt if this trend continued.
Further education on responsible borrowing and financial planning is needed to encourage Bruneian citizens to save more for their retirement.
We believe that credit restrictions will also help to wean local banks off overreliance on retail lending and will encourage them to seek out good risks in private sector – especially among Small and Medium Enterprises (SMEs).
The launch of large government projects presents local banks with an opportunity to participate in project finance which should reduce the amount of domestic liquidity parked outside the country.
Oxford Business Group also welcomes the decision to establish a new Monetary Authority that starts operating next year. We believe it is an important move in adopting a centralised monetary policy even though the domestic currency remains de facto pegged to the Singaporean dollar. A fixed exchange rate mechanism we believe continues to serve Brunei well as a monetary anchor, which gives plenty of assurance to foreign and local investors.
One of the main highlights in 2010 has been further development of Brunei Halal brand which is one of the key diversification drivers at the moment. In our view the project represents the best kind of value added as it attempts to capitalize on Brunei’s solid reputation in adherence to traditional sharia laws.
The scope for growth in this lucrative niche in our view is quite significant given the wide range of products that can be both manufactured and certified in Brunei. Our research in other countries we cover in the Middle East and the Gulf shows that the demand for premium halal products from Brunei is likely to be high.
The Halal sector also creates supply linkages to up-and-coming agricultural sector with food self-sufficiency still high on the government’s policy agenda.
Brunei we argue in the Report has a favourable climate for growing high yielding crops that could reduce its dependence on imported food items. The success of Laila harvest recently shows that determined policy initiative in agribusiness can lead to fast results. It is not inconceivable that Brunei will become self-sufficient in rice in the next five to ten years.
The main constraint continues to be land availability as Brunei tries to reconcile its need to increase agricultural output with environmental protection.
Apart from the key competitive advantages such as location, highly educated workforce and stable political environment, Brunei has recently been awarded a higher rank by the World Economic Forum Global Competitiveness Report 2009-2010 which ranked Brunei 32nd overall out of 133 countries.
This was up seven places up since last review period. Despite restrictive procedures in property and business registration Brunei continues to receive high marks for taxes, inflation, crime, public health and corruption.
Meanwhile, on the downside labour market concern was amongst the most cited issues in 2010. Education and improvement in available human resources remains of the main development challenges for Brunei in achieving a more balanced economy. The government sector continues to account for a disproportionately large percentage of total employment with graduates still preferring the security of a public sector career according to people we have interviewed for this Report.
Although diversification and non-oil sector growth is a key theme that continues to run throughout our Reports we should not overlook some positive developments in the energy sector.
Boundary dispute resolution between Malaysia and Brunei was a historical event that freed up the path for development of new offshore fields. Participation of new oil majors such as Malaysia’s Petronas, Total, Billiton and Amerada Hess will boost the local skill set and will help Brunei to retain an edge in offshore drilling technologies.
We expect new geological and 3-D seismic surveys conducted in the fields will lead to new offshore discoveries that will help to offset the natural decline in oil production and will give Brunei more breathing space in terms of creating a non-oil economy. Nonetheless, we argue this should not act as a reason to delay the process of diversification that is well under way.
Because diversification, as we have argued before and do so in this Report, is not just about alternative wealth creation – it is also about creating new jobs for aspiring Brunei graduates. It is about helping the population to reach its potential in the fields of business and engineering, research and innovation outside the governmental sector. We continue to maintain that while the government continues to provide a necessary welfare safety net more incentives ought to be offered for young graduates to join the private sector.
The emphasis in this year’s Report is on education and the role it plays in developing the necessary skill set for private sector employment. We believe the Bruneian universities are rising to this challenge even though the private sector is still too small to offer enough vacancies. Ultimately it is still down to the government itself to start a virtuous cycle.
Public investment we argue in our Report will act as the main catalyst in generating critical mass in private sector employment. The authorities need to be mindful to allow the private sector to attract some of the best minds and continue offer incentives to SMEs and new start ups.
We envisage an important role in this regard for foreign companies that we believe will become more active once recovery gains traction.
With its strategic location and stable legal, political and macroeconomic environment Brunei is set to attract foreign investors interested in joint ventures with Bruneian firms making it among the most attractive niche investment destinations in South East Asia.
On this note I would like to thank you very much again for your attention and look forward to your feedback.
Terima kasih (Thank You)
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