With one of the world’s largest endowments of hydrocarbons relative to the size of its population, Brunei Darussalam has naturally built its economy around the production and export of oil and gas. Energy exports have funded a high general standard of living and substantial outward foreign investment. However, like many of the world’s traditional oil and gas producers, the Sultanate now faces the challenge of maturing fields. As economic growth has slowed amid a decline in oil and gas output, the government has responded by accelerating exploration and intensifying diversification efforts. Most significantly, it has attracted a large Chinese investment into an oil refinery and petrochemicals complex. As a result, the IMF is forecasting a return to strong growth over the remainder of the decade.
Brunei Darussalam’s economy has sustained a modest pace of growth, despite a substantial decline in combined oil and gas output since it peaked in 2006. According to the government’s Department of Economic Planning and Development (JPKE), a 2.9% average annual growth in domestic demand between 2006 and 2013 outweighed a 3.8% average annual contraction of export volumes, resulting in overall average annual growth of 0.2% for the period.
The year 2013 saw GDP contract by 1.8%, as growth in domestic demand of 2.8% was unable to overcome a 10.1% drop in export volumes. The government attributed the drop to repairs of oil and gas infrastructure, and indeed monthly exports were recovering strongly in early 2014. Growth is also sensitive to global cycles, contracting in 2008-09 during the financial crisis and rebounding strongly with the recovery in 2010-11.
As oil prices surged, the dollar size of the economy leapt from $5.8bn in 2002 to $14.4bn in 2008, equal to average annual growth of 16.2% in dollar terms, but only 0.2% in real terms. As the oil price fell and rebounded, GDP declined to $10.7bn in 2009 and then recovered to $16.7bn in 2011. In 2013 GDP was $16.1bn.
Besides high oil prices, the economy’s size in US dollars has also been boosted by appreciation of the Brunei dollar, which is pegged to the Singaporean dollar. US dollar GDP per capita more than doubled in the past decade, rising from $18,930 in 2003 to $39,700 in 2013.
The government minimises volatility with a highly conservative fiscal policy. Budgets plan for large surpluses – indeed, so large that the government could maintain a stable domestic economy even if oil and gas prices were to collapse. According to data provided by the government to the IMF, it ran a BN$3.6bn ($2.82bn) surplus in 2013, equal to 18% of GDP, and a BN$3.8bn ($2.98bn) surplus in 2012, equal to 17.7% of GDP.
The large fiscal surpluses are backed by significant trade surpluses, which came to BN$8.8bn ($6.9bn) in 2013 and BN$10.6bn ($8.31bn) the previous year. Fiscal surpluses are directed to multiple sovereign wealth funds managed by the Brunei Investment Authority, a unit of the Ministry of Finance.
The conservative policy showed its stabilising power during the oil price slump that followed the global financial crisis. Even though government revenues dropped by 44% year-on-year during the fiscal year ending March 2010, the government was able to counteract the crisis by boosting its spending by 11%, and still ran only a small deficit of 1.5% of GDP.
Recent strength in domestic demand has been supported by a loosening of credit policy. Lending to the private sector showed 3.9% growth in 2012 and accelerated to 9.5% in 2013, after contracting between 2009 and 2011. There has been no noticeable impact on inflation. Consumer prices gained 0.2% in 2013, and averaged 0.7% annual growth over 2004-13.
Economic & Social Structure
Brunei Darussalam’s economy is made up of three main segments: oil and gas, government and the non-hydrocarbons private sector. At the same time, the population is divided into three main social groups: native citizens, who are predominantly Malay; immigrant citizens and permanent residents, who are mainly Chinese; and foreign labourers with temporary residency, who are largely from neighbouring Indonesia and the Philippines.
The three main economic segments each play complementary roles in employing and providing income to the three main social groups. Native citizens, numbering around 280,000 according to JPKE data, are economically middle class or well to do, and they work mainly in government and white-collar professional jobs, while enjoying many public benefits. Ethnic Chinese, who number around 40,000, are also middle class or wealthy, and they dominate the ownership and management of non-energy private businesses. Foreign labourers with temporary residency, numbering around 80,000, do most of the lower-skill and blue-collar jobs, including some relatively highly paid jobs in the oil and gas sector. Temporary residents also include smaller numbers of expatriate professionals, working mainly in the oil and gas and education sectors.
Brunei Darussalam has the third-highest output of oil and gas per capita in the world, at about 0.9 barrels of oil equivalent per day per resident, according to 2011 data from the International Energy Agency. That was roughly twice the output per capita of Saudi Arabia or the UAE, and was behind only Qatar and Kuwait. As such the oil and gas industry dominates the economy, directly accounting for around two-thirds of total output. Oil and gas extraction accounted for 52% of GDP in 2013, with BN$10.4bn ($8.16bn) of value added, according to JPKE. Processing of oil products, liquid natural gas and methanol totalled another 11.5% of GDP, with BN$2.3bn ($1.8bn) of value added. The industry’s gross export revenues, not including methanol, came to BN$13.8bn ($10.8bn) in 2013, equal to 69% of GDP. Those figures exclude domestic sales of 10,000 barrels a day of locally refined oil products and 300m cu feet per day of gas, according to Brunei Shell Petroleum (BSP) and the US Energy Information Agency. BSP, a joint venture between Royal Dutch Shell and the national oil company, Brunei National Petroleum Company (BNPC), is the sole oil and gas producer.
Oil & Gas
The oil and gas industry almost single-handedly funds the government. Its share of oil and gas revenues came to BN$10.2bn ($8bn) in the fiscal year ending March 2013, accounting for 88% of the total, according to JPKE. The industry is also a major payer of the various other taxes, fees and rents that comprise the other 12% of revenues, particularly corporate income tax, which made up 3% of revenues. However, the industry employs only around one-sixth of the workforce, with 29,414 employees in the extraction and processing industries, according to IMF numbers based on a 2010 census of private employment. Of those, 10,858 – or 37% – were citizens or permanent residents, while 18,556 – or 63% – were temporary residents. That compares to total employment of 193,500 in 2010, according to the Department of Statistics.
The government sector is the main employer of native citizens, with 48,145 government employees in 2012, according to JPKE, or just over one-quarter of the workforce. The government’s gross spending came to BN$7.4bn ($5.8bn) in the fiscal year ending March 2013, equal to 35% of GDP. Government services accounted for 12.5% of GDP in 2013 with BN$2.5bn ($1.96bn) of value added. Public utilities – electricity and water – accounted for 0.7% of GDP in 2013, with BN$143m ($112m) of value added.
The non-energy private sector is the largest employer overall: the 2010 employment census counted 87,773 employees within it, almost half the workforce, including 26,453 citizens and permanent residents, and 61,320 temporary residents. However, the 2010 employment census did not capture around 20,000 citizens and permanent residents who reported being employed in a 2011 population census, most of whom were probably working in the non-energy private sector. The non-energy private sector accounted for 23.3% of GDP in 2013, with BN$4.7bn ($3.69bn) of value added. The component industries include construction (3.4% of GDP in 2013), transport and communications (3.6%), wholesale and retail trade (3.7%), finance (3.1%), real estate (2.4%), restaurants, hotels and other services (5.7%), agriculture, forestry and fisheries (0.7%), and non-oil-and-gas manufacturing (0.8%). Non-energy exports – mainly tourism services, methanol and used cars – came to BN$1.5bn ($1.18bn) in 2013, equal to 7.5% of GDP.
High Living Standards
Citizens and permanent residents enjoy a good standard of living, higher than is reflected by household consumption spending, which was just 22% of GDP in 2013, or $8851 per capita. Those figures partly reflect the high proportion of GDP saved in the sovereign wealth fund. They are also depressed by the low spending of foreign labourers, who make up about one-fifth of the population and take or send home much of their income. Statistics on household spending likely also miss significant expenditure by Bruneians while travelling abroad.
Consumer goods and services are relatively inexpensive for a high-income country, thanks to low-cost imported labour and subsidies on automotive and cooking fuels, electricity, water and rice. For example, petrol costs just BN$0.53 ($0.42) per litre. The government also keeps beef and mutton prices relatively low by owning its own cattle ranch in Australia. Very little tax is collected from households, mainly consisting of excise taxes on cars and tobacco, and road tax. There are no personal income, sales or withholding taxes other than a mandatory pension contribution of 3.5% of gross pay.
Public services are high quality, and health care and primary and higher education are free for both citizens and permanent residents. Citizen families who do not own a home are allocated land at below-market prices and can receive interest-free loans to finance home building. Low-income citizens are eligible for free land or state-built affordable housing. There is a strong public pension system with a retirement age of 60.
The government remains determined to diversify the economy, although high oil prices have resulted in a rise in local production costs. The government is also keen to reduce citizens’ dependence on public sector employment, as a bulge in the 10-39 age range has resulted in an unemployment rate of 9.3%, according to a 2011 census.
The government’s efforts include programmes to teach and instil entrepreneurialism and encourage young people to seek private sector careers, as well as efforts to simplify the process of starting a new business by cutting red tape (see analysis). The government is also encouraging private employers to hire more locals with tighter controls on employment of foreign labour and policies that enforce local employment quotas on government and hydrocarbons industry contractors. However, the government is mindful of the role that foreign labour plays in holding down costs, and is not trying to push locals into undesirable jobs.
The government also seeks to recruit high-profile foreign investments. In the biggest inward investment outside oil and gas, the government has attracted Canadian flight training company CAE, which opened the CAE Brunei Multi-Purpose Training Centre in 2014 after a $70m investment and officially began training in September of that year. The centre, a 60:40 joint venture with Brunei Darussalam’s government, is one of the region’s largest helicopter simulator training centres, and the only one to offer training in the latest Sikorsky Black Hawk models. The centre will primarily serve the Brunei Darussalam military and the oil and gas industry, but the firm has ambitions to target the broader ASEAN region as well. The centre also plans to expand into emergency response and health care training, bringing the total investment to over $100m.
Another large, long-term project planned by the government is to develop Brunei Darussalam’s isolated eastern region, Temburong. Separated from the rest of the country, Temburong is currently reachable only by boat or a roundabout drive with two border crossings. To improve accessibility, the government will spend $2bn to build a 30-km link, including a 14-km bridge over Brunei Bay. Development potential includes eco-tourism, shrimp farming and other agriculture.
Apart from efforts to diversify away from hydrocarbons, the government is also seeking to reap more benefits from its oil and gas industry by moving downstream into processing and petrochemicals. Mohammad Zulfadhli bin Haji Hussin, project officer at JPKE, told OBG the emphasis on downstream business represented a policy U-turn taken in 2008 with the release of the Wawasan Brunei 2035 (Brunei Vision 2035) development plan. “Until 2007 we used the term economic diversification to mean an effort to reduce dependency on oil and gas. With Vision 2035, one of the new policy directions is to develop the oil and gas sector itself in the downstream segment of the industry. The strategy is to take advantage of what we have and our natural competitive advantages,” Hussin said.
The first such project was a $600m methanol plant, built by a joint venture of BNPC and Japan’s Mitsubishi and Itochu, which began operating in 2010. A second, much bigger downstream project was agreed in 2012 with China’s Zhejiang Hengyi Group, a major producer of polyester. Hengyi is planning to invest $8bn in a huge oil refinery and petrochemicals complex, which is expected to be a major driver of Brunei Darussalam’s economic growth into the next decade. The first, $4.3bn phase of the project will include an oil refinery producing petrol, kerosene, diesel and jet fuel, and an aromatics cracker complex consisting of a naphtha cracker, a paraxylene plant and a benzene plant. The project’s second phase, expected to begin around 2019, will double refining capacity and add a monoethylene glycol plant and a second paraxylene plant. The project will require its own power plant, a desalination plant and a bridge from the mainland to its 260-ha site on Pulau Muara Besar, an island in Brunei Bay.
Since only one-third of the plant’s crude oil feedstock will be sourced locally, the project represents a significant diversification away from dependence on domestic oil and gas output. The other two-thirds will be imported, mainly from the Gulf. In addition to land and other contributions, the Brunei Darussalam government put up BN$300m ($235m) of financing through the Strategic Development Capital Fund, a sovereign wealth fund, which holds a 30% stake in the project.
The Hengyi refinery and petrochemicals complex will have a powerful impact on the economy and is expected to help drive growth. The Sultanate is also making a serious effort to boost oil and gas output. The biggest near-term prospects will be in developing already discovered cross-border fields, which had been held up due to the complexity of agreeing on how investment costs and output will be shared with Malaysia. While deep offshore drilling has so far been disappointing, unexplored prospects remain.
As of April 2014, the IMF was forecasting an average real growth rate of 4.5% from 2014 to 2019, which would be the fastest sustained real growth seen since the IMF began collecting data in the mid-1980s. Petrochemicals and infrastructure projects are expected to be the main drivers of growth. However, the IMF is predicting a significant decline in oil and gas prices over the remainder of the decade, which according to the April 2014 forecast will limit growth of US dollar GDP from $16.1bn and $39,700 per capita in 2013 to $18.9bn and $42,300 per capita in 2019. Whether this prediction comes to pass will hinge on questions such as whether China will sustain rapid growth, whether Iraq can boost output and whether the US government will limit liquefied natural gas exports.
In an alternate scenario of roughly stable oil and gas prices, retaining the IMF’s forecast real growth rates, GDP per capita would increase faster, to more than $47,000 by 2019. In almost any scenario, stability and relatively high incomes will continue to be distinguishing features of the economy for decades to come.
In the very long run, when the Sultanate’s oil and gas resources eventually run out, the government’s ability to engineer a smooth transition to other economic activities will largely depend on how well it has managed its large savings in sovereign wealth funds. As the country maintains a strict secrecy policy regarding its investments, this is difficult to forecast.
The Investment Management Institute, a US research organisation that tracks sovereign wealth funds, put the Bruneian funds’ value at $39.3bn. Fiscal surpluses in 2012-13 averaged around $3bn, and the IMF expects they will average $4bn in 2014-19, implying that the Sultanate’s rainy day savings will continue to grow.