19 Nov 2015; Financial Times
Brunei has narrowly escaped a second recession in two years but its recovery will be slow and erratic. The oil-dependent sultanate — one of the few countries in the world with an absolute ruler — is struggling to diversify its economy. Its neighbour Malaysia — itself badly hurt by collapsing oil prices — is unlikely to be much help.
The energy sector supplies about 60 per cent of Brunei’s economic output and led the country into a prolonged recession in 2013 and 2014, making it the only ASEAN economy to contract during the period. GDP growth turned positive in the second quarter of this year but not by much: the IMF expects the economy to contract overall by 0.5 per cent in 2015, after shrinking 2.3 per cent last year.
Income from hydrocarbons makes up 90 per cent of government revenue. The government expects its fiscal deficit to reach 10 per cent of GDP this year, a stark contrast with the 28 per cent surplus it enjoyed back in 2011. Yet the government is reluctant to cut spending lest the magnificently wealthy sultan incur public anger. Brunei’s contented populace has grown used to generous welfare benefits including subsidised housing and free healthcare and education, right up to university level. There is no personal income tax or sales tax.
The IMF noted in 2013 that 56 per cent of the population was employed by the public sector. According to FT Confidential Research, a Financial Times research service, the figure among the country’s citizens is much higher, at 70 to 80 per cent: locals dream of a cushy public-sector position and look down on private-sector jobs, mostly held by foreigners. Yet Brunei’s economy is not sickening only because of falling oil prices. Oil production is dwindling, too. Unless it can make new discoveries, the sultanate’s reserves will run out in 24 years.
It is trying to diversify away from oil by venturing into Islamic finance and halal food production. But progress is slow. Brunei’s first stock market will open only in 2017 and, even then, its offerings will be limited to a pool of small, uncompetitive state-owned enterprises. Surrounding Brunei on three sides is Malaysia, a global heavyweight in Islamic finance and potentially a fierce competitor for Brunei’s under-developed financial market and banking system.
For now, then, it is all about oil and gas. At a meeting with Malaysia in August, Brunei prodded its larger neighbour to develop several oil blocks along their sea boundary “at the earlier possible opportunity” in order to boost production. But Petronas, the Malaysian national oil company that owns all of Malaysia’s reserves, is adjusting to the reality of cheap oil by cutting capital expenditure. With oil prices unlikely to rise to $100 a barrel anytime soon, Brunei’s pleas are unlikely to impress Petronas.