Brunei bracing for tougher times after oil joyride

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Brunei mosque and housesPeaceful Brunei with its slow-motion pace of life and citizens pampered by an all-inclusive, but authoritarian nanny state will have to gear itself up for harder times after decades of an oil-and-gas-fueled welfare joyride.

In 2015, the country will register its third year of economic recession, the only ASEAN nation to do so. GDP is forecast to decline by 0.5 per cent (as per estimations of the International Monetary Fund) or 1.5 per cent (Asia Development Bank forecast), after shrinking 2.3 per cent in 2014 and 1.8 per cent in 2013.

The main reason for this is the country’s unchanged, huge and unhealthy exposure to oil and gas exports and its moderate success in diversifying the economy towards other, more sustainable sectors. The oil and gas sector keeps dominating the Sultanate’s economy, steadfastly accounting for more than 60 per cent of GDP and more than 90 per cent of exports, which dropped 10 per cent last year alone.

Declining oil prices and a drop in production due to maintenance and repair work at major oil wells have dented the country’s budget which will see a deficit in the fiscal years 2015-16 and 2016-17 (April-March) at least. The deficit is expected to be $2.28 billion in the running fiscal year or around $5,360 per citizen. As a result, the national budget had to be cut by $250 million to $6.4 billion. And with low oil prices persisting, Brunei’s finance ministry has already indicated that further cuts are to be expected.

With international analyst 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.

Fiscal deficit is expected to reach 16 per cent of GDP this year, a stark contrast to the 28 per cent surplus Brunei enjoyed back in 2011. Citizens will have to brace for cuts in public spending as the time of generous handouts by the Sultan is likely coming to an end.

 

“The government will practice prudent spending to balance out its expenditure and revenue,” Brunei’s finance minister Abdul Rahman Ibrahim said earlier this year.

In defense of Brunei’s leaders, the government has indeed been trying to diversify the economy by using oil revenues to invest in non-oil industries like Islamic banking and by attracting foreign direct investments, mainly from Japan and China, into projects such as a methanol factory, a steel pipe factory and a refinery. Focus on eco-tourism has also been high, given that 70 per cent of the country’ is covered by tropical forest.

But progress is slow and results can hardly be seen. The financial market and banking system remain underdeveloped and the announcement to establish a stock exchange by 2017 so far remained an announcement apart from the issue that a Brunei bourse would list mainly non-competitive local government-related companies. There is still not much industry outside the oil and gas sector. Royal Brunei Airlines keeps piling up losses despite restructuring efforts. The much-promoted halal brand for food and pharmaceuticals is not quite taking off. Tourists are not really interested in Brunei and Bruneians are not really interested in tourists. The increasingly dogmatic stance towards Islam and the recent introduction of Shariah law has undermined investor confidence further. And a strict ban on booze limits the country’s appeal to decadent infidel holidaymakers.

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. As 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 prolonged. Oil production is down 40 per cent since 2006.

The finance minister’s commitment to “prudent” public spending comes as an understatement. Brunei will have to seriously cut into its welfare expenditure if it wants to remain somehow economically fit. Currently, citizens are pampered with subsidised housing and loans, cheap gasoline, free healthcare and education up to university level. There is no personal income tax or sales tax.

The International Monetary Fund found another general flaw in Brunei’s social and economic system that, if not altered, could let the country’s wealth bleed dry in the foreseeable future. Between an estimated 70 and 80 per cent of Bruneians are employed by the state in more or less cushy positions, and citizens are lulled by the life concept that praying is compulsory, but hard work remains an option. As a result, private-sector jobs that need a higher degree of diligence are mainly held by foreigners most of which feel repulsed by the system.

Securing local talent from Brunei’s labour force of around 200,000 citizens is tough for foreign companies. This increases labour costs as skilled expatriates must be flown in and be offered a generous package to relocate to Brunei. The high cost of doing business is another problem. Brunei’s currency is pegged to the Singapore dollar, making it one of the most expensive places to live and work in the region while lacking Singapore’s international flair, first-class infrastructure, restaurants and entertainment options and even its cleanliness.

The recommendations by both International Monetary Fund and Asian Development Bank are that Brunei freezes public-sector wages and hiring for government positions, cuts fuel subsidies and abandons big public projects. Both called for measures to boost low productivity and encourage job growth.

And this will be a great game changer for Bruneians. The contended populace will have to accept that it cannot go on in the way it used to be. Yes, Brunei has about $40 billion in reserves from oil sales held by the Brunei Investment Agency, and the Sultan so far has been reluctant to cut welfare spending on concerns of public alienation. But he seems to be more interested in an even deeper religionisation of society rather than spurring business and job development which, however, is not a concept for future generations in terms of overall economic wellbeing. There seems to be no backup plan.

It is a fact that many wealthy Bruneians are indeed realising that the country’s economy is going downhill and do no longer reinvest their money at home. Over the past years of recession, there has been a massive money outflow from Brunei, international trade data show. Business confidence, entrepreneurial spirit and economic self-initiative  is suppressed, lowering the prospects for the younger generation. For many Bruneians, a life without oil money seems to be an alien concept. No wonder that the few newly-built industrial parks stand largely empty.

Model calculations show that if the Brunei dollar would be de-pegged from the Singapore dollar, inflation in Brunei would skyrocket and the international purchasing power of the Brunei dollar would drop significantly. 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 is overvalued by at least 25 per cent. If that’s not an eye opener, it’s hard to see what else it could be.

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Reading Time: 4 minutes

Peaceful Brunei with its slow-motion pace of life and citizens pampered by an all-inclusive, but authoritarian nanny state will have to gear itself up for harder times after decades of an oil-and-gas-fueled welfare joyride.

Reading Time: 4 minutes

Brunei mosque and housesPeaceful Brunei with its slow-motion pace of life and citizens pampered by an all-inclusive, but authoritarian nanny state will have to gear itself up for harder times after decades of an oil-and-gas-fueled welfare joyride.

In 2015, the country will register its third year of economic recession, the only ASEAN nation to do so. GDP is forecast to decline by 0.5 per cent (as per estimations of the International Monetary Fund) or 1.5 per cent (Asia Development Bank forecast), after shrinking 2.3 per cent in 2014 and 1.8 per cent in 2013.

The main reason for this is the country’s unchanged, huge and unhealthy exposure to oil and gas exports and its moderate success in diversifying the economy towards other, more sustainable sectors. The oil and gas sector keeps dominating the Sultanate’s economy, steadfastly accounting for more than 60 per cent of GDP and more than 90 per cent of exports, which dropped 10 per cent last year alone.

Declining oil prices and a drop in production due to maintenance and repair work at major oil wells have dented the country’s budget which will see a deficit in the fiscal years 2015-16 and 2016-17 (April-March) at least. The deficit is expected to be $2.28 billion in the running fiscal year or around $5,360 per citizen. As a result, the national budget had to be cut by $250 million to $6.4 billion. And with low oil prices persisting, Brunei’s finance ministry has already indicated that further cuts are to be expected.

With international analyst 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.

Fiscal deficit is expected to reach 16 per cent of GDP this year, a stark contrast to the 28 per cent surplus Brunei enjoyed back in 2011. Citizens will have to brace for cuts in public spending as the time of generous handouts by the Sultan is likely coming to an end.

 

“The government will practice prudent spending to balance out its expenditure and revenue,” Brunei’s finance minister Abdul Rahman Ibrahim said earlier this year.

In defense of Brunei’s leaders, the government has indeed been trying to diversify the economy by using oil revenues to invest in non-oil industries like Islamic banking and by attracting foreign direct investments, mainly from Japan and China, into projects such as a methanol factory, a steel pipe factory and a refinery. Focus on eco-tourism has also been high, given that 70 per cent of the country’ is covered by tropical forest.

But progress is slow and results can hardly be seen. The financial market and banking system remain underdeveloped and the announcement to establish a stock exchange by 2017 so far remained an announcement apart from the issue that a Brunei bourse would list mainly non-competitive local government-related companies. There is still not much industry outside the oil and gas sector. Royal Brunei Airlines keeps piling up losses despite restructuring efforts. The much-promoted halal brand for food and pharmaceuticals is not quite taking off. Tourists are not really interested in Brunei and Bruneians are not really interested in tourists. The increasingly dogmatic stance towards Islam and the recent introduction of Shariah law has undermined investor confidence further. And a strict ban on booze limits the country’s appeal to decadent infidel holidaymakers.

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. As 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 prolonged. Oil production is down 40 per cent since 2006.

The finance minister’s commitment to “prudent” public spending comes as an understatement. Brunei will have to seriously cut into its welfare expenditure if it wants to remain somehow economically fit. Currently, citizens are pampered with subsidised housing and loans, cheap gasoline, free healthcare and education up to university level. There is no personal income tax or sales tax.

The International Monetary Fund found another general flaw in Brunei’s social and economic system that, if not altered, could let the country’s wealth bleed dry in the foreseeable future. Between an estimated 70 and 80 per cent of Bruneians are employed by the state in more or less cushy positions, and citizens are lulled by the life concept that praying is compulsory, but hard work remains an option. As a result, private-sector jobs that need a higher degree of diligence are mainly held by foreigners most of which feel repulsed by the system.

Securing local talent from Brunei’s labour force of around 200,000 citizens is tough for foreign companies. This increases labour costs as skilled expatriates must be flown in and be offered a generous package to relocate to Brunei. The high cost of doing business is another problem. Brunei’s currency is pegged to the Singapore dollar, making it one of the most expensive places to live and work in the region while lacking Singapore’s international flair, first-class infrastructure, restaurants and entertainment options and even its cleanliness.

The recommendations by both International Monetary Fund and Asian Development Bank are that Brunei freezes public-sector wages and hiring for government positions, cuts fuel subsidies and abandons big public projects. Both called for measures to boost low productivity and encourage job growth.

And this will be a great game changer for Bruneians. The contended populace will have to accept that it cannot go on in the way it used to be. Yes, Brunei has about $40 billion in reserves from oil sales held by the Brunei Investment Agency, and the Sultan so far has been reluctant to cut welfare spending on concerns of public alienation. But he seems to be more interested in an even deeper religionisation of society rather than spurring business and job development which, however, is not a concept for future generations in terms of overall economic wellbeing. There seems to be no backup plan.

It is a fact that many wealthy Bruneians are indeed realising that the country’s economy is going downhill and do no longer reinvest their money at home. Over the past years of recession, there has been a massive money outflow from Brunei, international trade data show. Business confidence, entrepreneurial spirit and economic self-initiative  is suppressed, lowering the prospects for the younger generation. For many Bruneians, a life without oil money seems to be an alien concept. No wonder that the few newly-built industrial parks stand largely empty.

Model calculations show that if the Brunei dollar would be de-pegged from the Singapore dollar, inflation in Brunei would skyrocket and the international purchasing power of the Brunei dollar would drop significantly. 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 is overvalued by at least 25 per cent. If that’s not an eye opener, it’s hard to see what else it could be.

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