The economy, buoyed by hydrocarbon revenues, has continued to grow, enabling a new push to greater diversification and increased hiring of locals. The government maintains strong fiscal and current account surpluses and is showing a strong appetite to direct this towards future growth and diversification. Indeed, with oil and gas making up more than two-thirds of the economy, the government is well aware of the dangers of overdependence on these commodities, vulnerable as they are to global price fluctuations. As such, the government is looking to diversify the economy, particularly in the downstream sector, and bolster a private sector capable of generating jobs for Bruneians.

GENERAL PERFORMANCE: The year 2011, the latest date for which statistics are available, was a stellar one for the Bruneian economy. GDP at current prices grew by 2.2% to BN$20.6bn ($16bn). This figure even exceeded 2008, a year in which global oil prices reached an historic high of $147 per barrel. Brunei Darussalam’s economy, however, is still very much dependent on this price and the revenue generated from hydrocarbons. The hydrocarbons sector accounted for 67.7% of GDP – BN$13.9bn ($10.8bn) in 2011, according to the Department of Economic Planning and Development (JPKE) at the Prime Minister’s Office.

While other economic areas are fully eclipsed by the contributions of the hydrocarbons sector, other important segments of the economy include the government sector (11.7% of GDP), construction (2.7% of GDP), wholesale and retail trade (3.2% of GDP), finance (2.8% of GDP), and business services (3.1% of GDP).

EXPORTS: Exports of goods and services reached BN$15.6bn ($12.2bn) or 80% of GDP. This was largely driven by crude petroleum and LNG exports. In 2011 crude petroleum exports reached an average of 153,105 barrels per day (bpd) at an average price of $116.13 per barrel, according to the JPKE. As such, the value of crude petroleum exports reached BN$7.96bn ($6.2bn) in 2011. LNG exports reached an average of some 985,204m British thermal units (mmbtu) per day at an average price of $16.49 per mmbtu in the same year, according to the JPKE. Consequently, the total value of LNG exports was BN$7bn ($5.46bn) in 2011. Taken together, crude petroleum and LNG accounted for 95.6% of exports in 2011.

Given the high crude prices, it is unsurprising that the country has been running substantial current account and fiscal surpluses. The balance of trade reached BN$11.95bn ($9.31bn) or 58% of GDP in 2011.

The balance widened by 32.3% in that year due to increased export revenue from hydrocarbons. As such, the current account balance stood at 53.49% of GDP in 2011, according to the JPKE, up from 48.55% in 2010.

These surpluses have created a significant cushion for the country and help to limit the risk to the economy.

CURRENCY PEG: This cushion is supported by the peg to the Singapore dollar, in place at a ratio of 1:1 since 1967. The introduction of the new financial regulator, the Autoriti Monetari Brunei Darussalam (AMBD) in 2011 led to speculation that Brunei Darussalam might look to depeg, but the government has since reaffirmed its commitment to the peg.

The peg to the Singaporean dollar has largely served the country well over the years. Brunei Darussalam is protected from wider foreign exchange rate volatility, the currency is stable and the real exchange rate closely matches the fundamentals of the economy. While the AMBD has not appropriated the tools to manage monetary policy independently, the Bruneian economy remains largely stable, and price pressures have been relatively contained.

CPI inflation increased by a modest 2% in 2011, a highly satisfactory figure. Among the main drivers of this inflation were food items and non-alcoholic beverages, sales of which increased some 3.5% in 2011. However, inflation remains of little concern, with the CPI figure holding steadily at under 3% over the past four years.

BUDGET CONSIDERATIONS: Brunei Darussalam’s strong and stable macroeconomic position is also supported by a prudent fiscal policy. According to the JPKE, the government ran a BN$2.96bn ($2.3bn) surplus in 2010-11, which is equal to 17.5% of 2010 GDP.

According to the CIA World Factbook, Brunei Darussalam’s fiscal position placed it fifth globally in 2011, in terms of budget-surplus-to-GDP ratios. The government continues to adopt a conservative and prudent fiscal policy. While the 2012-13 budget saw a spending increase of BN$100m ($78m) on the previous year, bringing total spending to BN$5.9bn ($4.6bn), the government still expects to run a BN$387.9m ($302m) surplus in the fiscal year (given the high oil price this could be much higher). Much of the government’s spending is focused on funding the operations of the public sector and the country’s generous welfare provisions. In the fiscal year 2011-12, current expenditure accounted for 72.1% of total spending.

Wages and salaries alone accounted for BN$1.86bn ($1.5bn) in spending. In the same year, development expenditure accounted for 18.1% of total spending or BN$1.05bn ($817.7m). The prudent spending policy has ensured that the country has strong savings and is well positioned to absorb any adverse shocks.

However, the government has also recently emphasised targeted spending to help diversify the economy and support private sector growth. In the 2012 Article IV Consultation, the IMF applauds the government for an increased medium-term development budget for “infrastructure investment and improvements in human capacity”. Indeed, the 2012-13 budget emphasises building human resources and human capacity. The additional BN$100m ($778,800) in the 2012-13 budget will be largely dedicated to human capacity building. Infrastructure such as housing, roads and bridges will also be an area of focus. It is also hoped that a focus on capacity building and support for small and medium-sized enterprises (SMEs) will bring additional competitiveness to the economy and bolster foreign direct investment (FDI). According to the JPKE, FDI increased by 39.4% year on year in the fourth quarter of 2011 to BN$372.9m ($290m). However, 89.2% of this was directed towards the mining and quarrying sector, illustrating the ongoing focus on the oil and gas sector.

OIL & GAS PERFORMANCE: Nonetheless, Brunei Darussalam’s hydrocarbons products seem to be serving the economy well, with the government able to market its hydrocarbons products successfully through attractive contracts. Indeed, Brunei Darussalam’s average oil price was almost $5 per barrel above the average Brent crude spot price of $111.26 in 2011.

In the natural gas market, Brunei Darussalam’s LNG price was approximately $12 per mmbtu above the Henry Hub spot price (approximately $4 per mmbtu according to the US Energy Information Administration), the benchmark price for the US natural gas market. Brunei Darussalam has been able to negotiate beneficial long-term LNG contracts with large economies such as Japan and South Korea, both countries that are at present considerably dependent on energy imports.

Economic performance in the short to medium term will be dependent on the country’s ability to maintain or grow its current hydrocarbons output. Brunei Darussalam has proven oil reserves of 1.1bn barrels, according to the BP Statistical Review 2012. However, the review suggests that at the current rate of production Brunei Darussalam has only 18.2 years of oil left (the reserves-to-production ratio). Indeed, the current state of Brunei Darussalam’s fields seems to be in slight decline. According to the JPKE, the number of oil producing wells fell from an average of 735 in 2011 to 709 in the first quarter of 2012 (by the third quarter it had increased slightly to 721). Consequently, overall output decreased by 7% from an average of 147,909 bpd in 2011 to 137,526 bpd in the third quarter of 2012.

The government has taken a number of steps aimed at bolstering production and sustaining the Sultanate’s hydrocarbons output for as long as possible. Brunei Darussalam Shell Petroleum, a 50:50 joint venture between the government and the Royal Dutch Shell group of companies, is looking at numerous measures to prolong the life of its more than 4500 individual reservoirs. This includes an extensive deep-water offshore drilling programme and significant investment in secondary and tertiary recovery from the reservoirs.

Since 2007, the government has also signed a number of production sharing contracts (PSCs) for exploration and development of onshore and deep-water blocks within the Sultanate’s territory. The initial signs for these new blocks have been mixed, however, and it is expected that the most immediate potential will likely come from the onshore reservoirs.

ECONOMIC RISK & DEPENDENCE: Indeed, the fragile state of Brunei Darussalam’s reserves has emphasised once again the Sultanate’s dependence on its hydrocarbons revenues. The latest GDP predictions for the full year 2012 by a number of institutions illustrate the importance of the hydrocarbons sector to the Sultanate’s economic growth. The JPKE announced in December 2012 that it revised its 2012 GDP growth rate forecast downwards to 1.6%. This is down from a figure of 2.2% in 2011 and is the result of a poorer performance in the hydrocarbons segment. Indeed, their figures show that the oil and gas mining segment contracted by 1.2% in 2012, while the LNG segment also witnessed a decline of 1.5%. While the non-oil and – gas sector was expected to grow by 4%, the dependency on hydrocarbons revenue has curtailed growth. According to a statement by the JPKE in December 2012, the forecasts for moderate growth are based on faltering hydrocarbons production: “The underlying assumptions for this view are the lower average crude oil and LNG production levels.”

DOLLAR DEPENDENCY: International bodies are also revising their forecasts for Brunei Darussalam. The Asian Development Bank (ADB) and the International Monetary Fund (IMF) both revised their GDP growth forecasts downwards to 1.5% and 2.7%. An October 2012 update to the Asian Development Outlook 2012 of the ADB stated, “Production of oil and gas is expected to pick up, but in light of production lower than expected in January until June, forecasts for full-year GDP growth are revised down to 1.5% for 2012 and to 2.1% for 2013.” Beyond output and pricing, the country’s hydrocarbon sector and the economy as a whole are dependent on the strength of the US dollar. As such, the country’s dependence on hydrocarbons revenues exposes it to potential exogenous shocks and the challenges of dwindling output at home.

Given the government’s conservative fiscal regime, this may bear little risk to macroeconomic stability for the foreseeable future. Indeed, the IMF 2012 Article IV Consultation with Brunei Darussalam, conducted in July 2012, notes, “Risks to the economy are limited and well managed, and the country has substantial room to absorb adverse shocks.”

In the short to medium term, Brunei Darussalam’s strong economic performance should be maintained through the continued demand for its hydrocarbons products. However, in the longer term, other economic segments will need to emerge to support future growth. Indeed, without its finite hydrocarbons reserves, the country’s economy would look very different. The Sultanate would have a large negative balance of trade without the high-value hydrocarbons exports. In 2010, this would have reached a trade deficit of BN$2.76bn ($2.15bn), according to figures from the JPKE. Similarly, the government’s non-oil primary budget balance was BN$4.78bn ($3.7bn) in 2011-12, according to the IMF. This indicates the government’s almost exclusive dependence on the hydrocarbons sector for revenue generation. Indeed, in the 2010-11 budget, oil and gas tax revenue accounted for 89% of total tax revenue. Shazali Sulaiman, chairman of the Brunei Darussalam International Chamber of Commerce and Industry, told OBG, “I think the government budget has always been consistent every year. What will happen if, by 2035, the energy sector is no longer a reliable source of tax revenue for the government? If this happens, the government will need to look at options for increasing the tax base. It would have to explore introducing a personal income tax, VAT, and goods and services tax.”

FEELING TAXED: While there are provisions in the tax code for personal income tax, the government currently does not levy this on citizens or expatriate residents. According to the IMF, in the 2010-11 budget, the government received BN$5m ($3.9m) in tax revenues from individuals (in the form of estate and stamp duty). It also received BN$150m ($116.8m) in non-hydrocarbons corporate taxes, BN$137m ($106.7m) in taxes on international trade, and BN$19m ($14.8m) for taxes on goods and services. This revenue paled in comparison to the BN$2.5bn ($1.95bn) the government received in corporate taxes from oil and gas firms. This sector also dominated the government’s non-tax revenues, reaching BN$1.3bn ($1bn) or 74% of all non-tax revenues (largely as royalties and dividends).

While this dependence on the oil and gas sector to maintain government revenues and spending presents a challenge, the government is unlikely to seek any significant changes to the tax code in the short term. Indeed, as the reduction in the corporate tax rate for non-oil and gas companies illustrates, the government is more focused on growing revenues by diversifying the economy and building the private sector. At a most basic level, the government supports diversification through the Brunei Darussalam Investment Agency (BIA), its sovereign wealth fund, that manages the country’s external assets. Established in 1983, the general reserve fund of the BIA is worth approximately $30bn, according to the Sovereign Wealth Fund Institute.

PETROCHEMICALS: However, it is the development of a more rounded economy at home, which can provide high-paying jobs and a more robust growth environment, that remains the government’s key concern. The first move in this direction will be a greater focus on downstream activity. Following the April 2010 commencement of the Brunei Methanol Company’s $600m methanol plant at the Sungai Liang Industrial Park (SPARK), the Sultanate has successfully attracted downstream-related investment from Zhejiang Hengyi Group (Hengyi), a privately owned Chinese company.

Hengyi has stated that it intends to invest $4bn to develop an integrated refinery and aromatics cracker plant capable of producing refined petroleum products and petrochemicals derivatives on Puala Muara Besar. In addition, Brunei Darussalam is also considering foreign direct investments in a new gas-based petrochemical complex at SPARK. This would produce ammonia, urea and its derivatives utilizing 500bn cu feet of natural gas allocated for downstream development. Indeed, Brunei Darussalam’s venture into basic petrochemicals will allow companies to move further downstream into the manufacturing and finished product segments NON-HYDROCARBONS: The government is also looking to other industries beyond the hydrocarbons value chain to drive economic growth in the coming decade. The country is focusing on a number of areas, including developing a halal centre, agricultural development for food security, tourism and the information and communications technology (ICT) sector.

In terms of the first of these ambitions, the country has also developed the Brunei Darussalam Halal brand, which it is hoped will receive widespread acknowledgement internationally for its observance of halal practices and quality. The brand is owned and managed by Brunei Darussalam Wafirah Holdings, following its award by the Ministry of Industry and Primary Resources. The government hopes that Brunei Darussalam Wafirah Holdings will be able to help SMEs capture a share of the international industry and allow Brunei Darussalam to tie up with international manufacturers in a halal industry worth $1.2bn with a 2010 customer base of 1.8bn people, according to the Halal Journal.

To help diversify the halal manufacturing sector and strengthen the Brunei Darussalam Halal brand, in 2010 the government released guidelines on the production of halal pharmaceuticals. Plans are currently underway to issue similar guidelines for halal cosmetics.

The country has also made significant strides in its plans to develop modern ICT infrastructure that will promote growth and help develop tech jobs within the country. In July 2012, $230m was allocated for the rollout of fibre-to-the-home as part of the 10th National Development Plan. The project will be carried out by the government and TelBru and will cover all the major areas in the country, delivering speeds of 150 megabits per second (Mbps). 4G LTE is also expected to be rolled out in 2013 by DST, the leading mobile operator in Brunei Darussalam. Indeed, the government and the private sector have been developing a number of projects and programmes to support the emergence of an indigenous ICT sector within Brunei Darussalam.

Two of the signature programmes are the Future Fund and the Accel-X Investment Fund. The Future Fund is a collaboration between the Brunei Darussalam Economic Development Board (BEDB), the Authority for Info-Communications Technology of Brunei Darussalam (AITI) and DST that provides seed capital of up to BN$150,000 ($116,820) to local ICT start-ups. The Accel-X Investment Fund is administered by BEDB and provides up to BN$1.5m ($1.17m) to early stage companies in high-tech sectors such as ICT or engineering.

EMPLOYMENT CHALLENGES: This programme, as well as the focus on ICT and halal development, demonstrates the government’s focus on sustainable local employment and SME development. With a low dependency ratio of 34.5% in 2011, the country has a large working-age population that could be used as the engine for growth. Indeed, this position, known as the “demographic gift”, when the government has less expenditure on welfare for dependents (the elderly and the young) and a large workforce with the potential to generate revenue and growth, was exploited by countries such as Hong Kong, Singapore, South Korea and Taiwan – the Asian Tigers – to achieve rapid economic growth between the 1960s and the 1990s.

Although Brunei Darussalam does not have the same mass – the total population was 425,000 in 2012 – it can still benefit from its active workforce. With 25.3% of the population under the age of 15, the potential labour force is set to grow in the coming years. This will present a challenge for the government. With a current unemployment rate of 1.7%, according to the JPKE, most nationals are being absorbed. Labour market participation stood at 75.7% for males and 56.4% for females in 2011. “If Brunei wants to create a quality population and a market capable of growing domestically it cannot be done by increasing the birthrate but by reviewing its immigration policy,” said Dato Dr Hj Ismail Hj Duraman, executive director of the Centre for Strategic and Policy Studies. “This will increase labour participation and create a more attractive domestic market.”

PRIVATE SECTOR EMPLOYMENT: According to the JPKE, there were 117,187 private sector jobs in 2010, of which only 25.7% were filled by citizens. Human resources is currently a key issue in Brunei Darussalam. While many companies are keen to hire more locals and to train these new recruits, limited funding and high costs often results in a heavy reliance on foreign staff.

One of the biggest problems is the predominance of foreign workers in the oil and gas sector. In line with the Brunei Darussalam Vision 2035, a manifesto for growth and development in the Sultanate, the Energy Department of the Prime Minister’s Office has set a number of targets for local content in the hydrocarbons industry.

These targets include the following: 60% of spending on energy goods and services generated by local companies, 50,000 jobs in the energy sector, 80% of employees in the sector are locals and 5000 domestic professionals employed in the energy sector. The government has already begun to push on these targets, with international oil companies such as Total responding well with a high rate of domestic employment and training.

The government is also looking at other measures to bolster local participation. For example, the 2012-13 budget introduced a scheme granting companies a tax credit of up to 50% on the basic salary of locals employed from January 1, 2012 and earning a monthly salary of $2385 or less. The credit will be effective for 36 months. The budget also provided additional funding for vocational training of locals. Companies will receive a tax deduction when they enrol nationals, earning up to $1590 per month on vocational training courses at accredited institutions.

Despite the dominance of the energy sector, opportunities exist in other areas. One such example was raised by Louis Leong, general manager at Rentokil Initial Brunei, who told OBG, “There is still a lot of opportunity in Brunei in terms of waste management and pest control, especially as the country’s economy develops.”

SME DEVELOPMENT: The main thrust for developing local human resources and diversifying the local economy is likely to come from an emphasis on building capacity amongst domestic SMEs. According to Shazali, “This decade (2010-20) has been declared the decade of SME development. It’s about improving financial management and the sense of corporate citizenship. The only way we can internationalise business is to have domestic business managed properly.”

According to the BEDB, SMEs account for 98% of businesses in Brunei Darussalam and 92% of employment in the private sector. However, SMEs have under-performed, with only limited capacity to expand internationally. SMEs in Brunei Darussalam often fall short of international compliance and corporate governance standards, according to the BEDB. Shazali suggested that many local firms may face difficulties with accounting practices and working capital management.

The government is trying to address these fundamental capacity issues and is working on a number of programmes that will support SME development. The most prominent initiative is the Promising Local Enterprise Development Scheme (PLEDS), which aims to internationalise local SMEs bringing greater competitiveness and growth locally. The programme will focus on four areas: advisory and mentorship, competency development, connectivity and capital assistance.

The scheme will involve workshops, networking opportunities to source foreign partners, human resources advice and capital grants. The last of these pillars will perhaps be the most important. It includes the Enterprise Technical Assistance Scheme (ETAS), a BN$3m ($2.33m) programme to help companies hire consultants and professional staff and to enable them to overcome market entry costs.

OUTLOOK: Such schemes illustrate the government’s commitment to improving competitiveness. Hydrocarbons predominate, and though the Sultanate continues to benefit from growth and macroeconomic stability, the country remains vulnerable to output challenges and exogenous shocks from falling prices or currency fluctuations. Moving downstream into value-added segments and creating new industries and local SMEs should help balance the future economy.