6 Dec 2015; Gulf Times
The small, but oil-rich Sultanate of Brunei Darussalam on the northern coast of Borneo could be one of the first collateral damages of prolonged low oil prices, experts find.
The country’s dependence on oil and gas income remains inappropriately high under the given market circumstances, both the International Monetary Fund (IMF) and the Asian Development Bank (ADB) find, as the Islamic nation’s efforts to diversify the economy have been broadly fruitless so far.
Since commercial oil production in Brunei started in the 1930s, the country has built up considerable wealth and as per IMF calculations was the fourth richest country in the world in 2014 with GDP per capita of $79,890, measured in purchasing power parity. Brunei just ranked behind Qatar, Luxembourg and Singapore, but ahead of Kuwait, Norway and the United Arab Emirates.
However, Brunei’s wealth is jeopardised by the fact that the oil and gas sector keeps dominating the economy in an unhealthy manner, steadfastly accounting for more than 60% of GDP and more than 90% of exports.
That way, the massive global oil price slump that started in 2013 did much harm to the nation’s finances.
Fiscal deficit is expected to reach 16% of GDP this year, a stark contrast to the 28% surplus Brunei enjoyed back in 2011. In 2015, the country will register its third year of economic recession in a row, the only Southeast Asian nation to do so. GDP is forecast to decline by 0.5% (as per IMF estimations) or even 1.5% (ADB forecast), after shrinking 2.3% in 2014 and 1.8% in 2013.
In fact, with international analysts predicting oil prices to stay low “for a long time,” Brunei’s self-conception of a tranquil, wealthy, independent and trouble-free nation is being put to the test after decades of generosity. Brunei’s 420,000 citizens enjoy all amenities of a nanny state that grants them subsidized housing and loans, cheap gasoline, free healthcare and education up to university level.
There is no personal income tax or sales tax.
An estimated 70% to 80% of Bruneians are employed by the state in more or less cushy positions, which pushes the overall productivity level of the country’s economy down.
But the comfortable times are seemingly coming to an end.
Estimates by the BP World Energy Outlook are that Brunei’s hydrocarbon reserves will run out in 22 years in case no new reserves are being discovered. And because the low oil price is demotivating Brunei’s oil partners such as Shell and Petronas to invest more in exploration, there is no reason to believe this grace period can be easily prolonged.
Brunei’s oil production, which peaked in 1979 at over 240,000 bpd and since has been deliberately cut back to extend the life of oil reserves and improve recovery rates, is down 40% since 2006 alone.
Attempts to diversify Brunei’s economy towards other, more sustainable sectors had limited success.
Although the government has been trying to broaden the economic base by using oil revenues to invest in non-oil industries like Islamic banking and halal food and pharmaceuticals, as well as by attracting foreign direct investments into projects such as a methanol factory, a steel pipe factory and a refinery, there was little impact so far and the few newly-built industrial parks are standing largely empty.
Both IMF and ADB are now recommending that Brunei freezes public-sector wages and hiring for government positions, cuts fuel subsidies and abandons big public projects, and in turn boosts low productivity and encourages job growth. In a first step, Brunei’s finance minister Abdul Rahman Ibrahim cut the national budget for this fiscal year by $250mn to $6.4bn and promised “prudent spending to balance out Brunei’s expenditure and revenue.”
And it’s about time. Calculations show that if the Brunei dollar, which is pegged to the Singapore dollar, would be de-pegged, inflation in Brunei would skyrocket and the international purchasing power of the Brunei dollar would drop significantly as the country needs to import 60% of its food and almost everything else.
In terms of Real Effective Exchange Rates, a measure by the World Bank to determine the real value of a country’s currency against the basket of its trading partners, the Brunei dollar through the peg is overvalued by at least 25%.