RaboResearch - Economic Research

Country Report Brunei

Country Report


Brunei flag

Brunei is a small, rich oil country in Asia. The country is highly dependent on the hydrocarbon sector, but the oil resources give the country a very comfortable external position and allow the government to be very generous to the local population. As a result, the population has displayed little dissatisfaction with the country’s slow democratization process. The religiously conservative royal family keeps a firm grip on Brunei and little progress is expected. This will be one of the main challenges going forward, especially in light of the extravagant lifestyle that the royal family often displays. Another major challenge is the need for economic diversification.

National facts of Brunei
National facts of  BruneiSource: EIU, CIA World Factbook, UN, Heritage Foundation, Transparency International, Reporters Without Borders, World Bank. Due to insufficient and delayed data availability, the figures presented in this evaluation should be interpreted with caution.

Introduction and update

Against the background of the global turmoil witnessed in the past years, Brunei is best characterized as stable and conservative. The gas and oil sector continues to dominate the Sultanate’s economy. The country still posts high surpluses on the current account and fiscal balance, on the back of income derived from hydrocarbon production. The religiously conservative royal family maintains a firm grip on the political situation, while the democratization process has merely been a series of symbolic moves. Unlike the Middle East, Brunei has experienced little pressure to liberalize the political system, as the less than half a million inhabitants of Brunei all benefit from the oil wealth. The government provides, among other things, free education up to university level, free health care as well as plenty public sector jobs. Although not all inhabitants benefit equally, this has not triggered widespread dissatisfaction. However, going forward, this will be one of the main challenges, especially in light of the extravagant lifestyle that the royal family often displays, with dissatisfaction expected to rise when the government is eventually forced to levy (income) taxes.

Economic growth slowed moderately from 2.2% in 2011 to an estimated 1% in 2012 on the back of slightly lower production and a dip in international oil prices. For 2013 and 2014, the economy is expected to grow around 2%. As the government has decided to pace the exploitation of oil and gas, economic growth is not expected to be much stronger in the near term. It is not clear whether this is purely a choice or whether this is partly the result of the mature state of Brunei’s oil fields. 

Figure 1: Economic growth
Figure 1: Economic growthSource: EIU
Figure 2: Crude oil prices
Figure 2: Crude oil pricesSource: Reuters Ecowin

Hydrocarbon sector supports external and fiscal position

The oil and gas sector accounts for about 95% of total export revenues and between 80% and 90% of total government revenues through corporate taxes on oil and gas production companies and royalties and dividend. The country generally boosts a huge current account surplus and comfortable fiscal surplus thanks to the hydrocarbon sector. The current account surplus was above 50% of GDP in 2012 and it is safe to assume that the current account will stay well in the black figures in the coming years. The primary fiscal balance dropped from 39% of GDP in 2008 to 4% of GDP in 2009, on the back of a sharp decline in oil prices in the wake of the global financial crisis. However, it has since recovered and posted a 35% of GDP surplus in 2012.Despite the quick recovery, the extreme volatility is worrying, as it shows the thin income base of the government’s revenues.

Despite the massive current account surpluses, foreign exchange (FX) reserves stood at merely USD 2.6bn end-2012 (about 2-4 months of import cover). Much of Brunei’s oil wealth is accumulated in its sovereign wealth fund. The Brunei Investment Agency is said to manage USD 30bn in assets around the world (more than twice the nominal GDP of Brunei).

Economic diversification remains long-term challenge

Even though the oil and gas reserves are said to last for several more decades (many estimates point to sufficient reserves for another 30 years, although some reports suggest that the reserves could last up to 80 years), Brunei’s economy is in need for economic diversification. The hydrocarbon sector accounts for about two thirds of the economy in nominal terms and the non-oil primary fiscal deficit was close to 24% of GDP (2012), which shows the extreme dependence on the hydrocarbon sector. The government realizes the need to stimulate the non-energy sector and has developed several plans, which among others call for investment in R&D in hi-tech technology. At the moment, the non-energy sector indeed grows a bit faster than the energy sector (1.8% against 4.3% in 2012), but the size of the non-energy sector is far smaller. Moreover, the government also does not want to divert too much investment and attention away from the profitable oil sector. One of Brunei’s ministers, for example, called on students to choose engineering as major. In that same line, the Sultan has stressed the localization targets in his New Year’s Eve speech. With these targets, Brunei aims to create more jobs for locals in the energy sector, in order to reduce the dependence on government jobs and increase the stake of Bruneians in the sector. Currently, only 40% of the jobs in the sector is done by locals and expatriates account for the other 60%.  

Economic indicators of Brunei
Economic indicators of BruneiBron: IMF; EIU. * Decomposition data for economic growth in 2011 is only available for 1Q-3Q.

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