Short Term Blues

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Brunei can expect a year of sluggish economic growth, with its key oil and gas sector expected to contract, undercutting expansion in other areas of the economy, according to state agencies.

In its July 5 report on expectations for 2008, Brunei's Department of Economic Planning and Development (DEPD) predicted GDP to increase by only between 0.5 - 1% year-on-year. The total GDP reached $13.5bn in 2007.

Weak performance from the energy sector, including the oil industry, would undermine economic expansion, the report said. If DEPD's predictions are correct, it will be the second year in a row that Brunei's economy has been flat. Growth was just 0.6% in 2007, well down on the 4.4% growth of the previous year.

The downturn in the oil industry was due in part to the state's decision to reduce output to preserve stocks, as well as new fields not meeting production expectations, said DEPD. Output fell by 13.1% in 2007, with production dropping to an average of 193,832 barrels per day from a figure of 219,000 in 2006.

According to DEPD's estimates, the country's oil and gas sector is expected to contract between 8 - 10% this year, even more than the 6.9% decline recorded in 2007. Though DEPD predicted a trade surplus for the year, this could also be lower than the $6.1bn in 2007, which in turn was 40% down on the previous year due to a fall in oil and gas exports. Despite this, high international oil prices are expected to continue to underpin Brunei's export earnings.

Some of the slack from the contraction in the energy industry could be taken up by non-oil and gas sectors. Any growth there is in the Brunei economy will be driven by these other industries, such as the service and financial sectors, with a "higher level of capital spending expected to bring more growth in the non-oil and gas sector in 2008," the report said. This expansion is expected to range from 10 - 12%.

Much of the investment in non-oil sectors comes directly from the state. Last year's growth rate for the non-oil sector was inflated due to an increase in spending by state bodies, which rose 15.8% from 2006. According to the DEPD, much of the growth in the non-oil segment of the economy will be down to sustained capital investments in projects under the national development plan, funded by the state.

In 2007, there was a 26.5% rise in investments, much of which came from government spending on projects as part of the national development plan. Under the 2008-09 budget, $728m of the $3.5bn total has been allocated to development projects.

DEPD's prediction that inflation will remain steady at between 1 - 2% is good news, though the agency said that global inflationary pressures due to rising commodity prices would continue this year. Given that the state subsidises many staples, including rice and sugar, along with providing price support for fuel and electricity, the hidden cost of inflation will be borne by the national budget, rather than consumers directly.

While state subsidies help keep inflation in check, there may be a limit on how far and how long the government will be prepared to protect its citizens from price shock.

On June 28, Dato Paduka Timothy Ong, the acting chairman of the Brunei economic development board, warned that inflation was becoming more of a challenge, despite the sultanate's low figures in comparison to other countries.

We are fortunate that the government provides us with subsidies for some basic goods, such as rice, sugar and petrol," Dato Timothy said in an interview with Radio Television Brunei. "But we have to remember, that such subsidies are not sustainable in the long term."

Dato Timothy also said that there was a growing need to diversify the economy through the creation of new industries in order to provide employment and reduce state expenditure.

"When new industries are created, the burden placed on the government in providing jobs will be lessened," he said.

While Brunei's economic forecast is flat, it is not expected to slip into recession. The sultanate can look forward to better times as the state's development projects, including the $437m methanol plant at Sungai Liang, come on line in 2009. The government hopes they will reduce the burden on the central budget.

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