RaboResearch - Economic Research

Country Report Brunei

Country Report


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Brunei’s economy contracted by 1.8% in 2013, but growth will be positive, though muted this year. The government has started to gradually introduce a sharia penal code. 

Strengths (+) and weaknesses (-)

(+) Vast natural resource endowment

Brunei has ample oil and gas reserves. Although the fields are ageing, the fields are estimated to remain in production for decades to come, especially if modern extraction techniques are used.

(+) Strong financial position

As a result of large and continuous revenues from oil and gas exports, Brunei has a very strong fiscal and external position.

(-) Narrow economic base

AS the economy is highly dependent on the oil and gas sector, it is susceptible to international oil and gas price fluctuations.

(-) Near-total lack of democracy

The same family has rules the country for six centuries and continues to maintain a strong grip over all aspects of politics. Progress towards democratisation, if any, will be very slow.

Key developments

1. GDP growth picks up again after contraction in 2013

The dominance of the oil and gas sector in Brunei’s economy renders the country vulnerable to both fluctuations of oil and gas production and international oil prices. While oil prices remained relatively high last year, oil and gas output suffered as a result of maintenance work on of offshore oil and gas production facilities. The output of the oil and gas sector contracted by 7.2% and total exports - most of which are hydrocarbons - declined by nearly 21% as a result in 2013. Growth of the non-oil sector of 2.7% partly offset the negative impact on overall economic growth. The construction sector grew quite strongly by 7.5% as a result of large projects, such as the construction of a bridge across the Brunei River. Hardly impacted by the lower production and export of hydrocarbons, private and public consumption grew by 3% and 3.2% respectively last year. Underlining the vulnerability of the economy of Brunei to negative developments in the oil and gas sector, which represents some two-thirds of the economy, overall real GDP growth was negative at -1.8% in 2013. This year, output of oil and gas will not be hampered as in 2013, and growth is therefore expected to pick up again. However, as Brunei has lowered the extraction rate of its oil and gas reserves, and these sectors dominate the country’s economy, overall real GDP growth will be relatively muted in the coming years at around 2% in 2014 and 2.5% in 2015.  

Figure 1: Growth picking up again
Figure 1: Growth picking up againSource: EIU
Figure 2: International oil prices
Figure 2: International oil pricesSource: Reuters Ecowin

2. Government to invest in both the oil & gas and non-hydrocarbon sectors to support long-term growth

The government of Brunei needs to take action to ensure that economic growth will be maintained in the very long-term. The country’s oil and gas fields are estimated to last for several more decades, but are ageing. To support growth in the long-term, the government has made plans to, on the one hand, diversify the economy and, on the other hand, invest in modern oil and gas extraction techniques and downstream petrochemical processing. A recently published energy white paper outlines the government’s plans for the hydrocarbon sector, in which it will invest between three and four billion US dollars a year. By using modern oil-extraction techniques, Brunei is planning to increase the recovery rate of the fields to 45% (the recovery rate is usually about 30%), which should increase output by some 20% over the next decades. Investments in downstream petrochemical processing are hoped to raise sales revenue from downstream activity tenfold, to USD 3bn in 2017 and USD 5bn in 2035 and increase the number of local jobs to 40,000 in 20 years. With regard to diversification plans, the government is focusing on agricultural and bio-industry development, as well as halal pharmaceuticals. Furthermore, developing the ICT sector is a priority. A memorandum of understanding for the construction of a fibre-optic cable that will link Brunei with Sabah in Malaysia has been signed recently. Also, funds have been allocated to connect most of the population to high speed internet via a fibre-optic network.

3. Introduction of Islamic sharia penal code

Brunei will introduce the Islamic sharia penal code gradually, starting in April 2014. In line with the believes of the religiously conservative royal family, a more conservative form of Islam is practised in Brunei than, for instance, in Malaysia or Indonesia. Sharia law is practiced, but up to now only in special courts that decide on family-law issues. Sharia criminal punishment will be introduced gradually, which could - in time - include punishments such as stoning to death, public flogging and the amputation of limbs. The code will only apply to Muslims and, as only two-thirds of the population is Muslim, not everyone will receive the same judicial treatment. International human rights organizations have criticised the new code. As usual in Bruneian politics, the population has had no say in whether or not the sharia penal code should be introduced. And, although there are only very limited options available to voice discontent, Bruneians have voiced criticism via social media and blogs. In response, Sultan Hassanal Bolkiah warned opponents that he considers critique as a personal insult and implied opponents of the introduction of the code would be prosecuted. Support for the sultan could be undermined as a result of the introduction of the code, but likely not to the extent that the autocratic rule would be jeopardised. 

Factsheet of Brunei
Factsheet of BruneiSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Brunei Darussalam 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 autocratic leadership. Brunei has been ruled by the same family for over six centuries. The religiously conservative royal family continues to keep a firm grip on Brunei and little to no progress towards democratisation 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. Also, the gradual introduction of a very strict form of Sharia Law may lead to dissatisfaction amongst the population.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. As the country’s oil fields are ageing (although modern extraction techniques are set to increase the life-span of the oil fields), the small country is focussing on diversifying the economy. Nonetheless, the dominance of the oil and gas sector will remain in the foreseeable future. As a result of Brunei’s large oil and gas endowments, the country generally boosts a huge current account surplus, a comfortable fiscal surplus and an exceptionally strong net external creditor position. Aside from Brunei’s foreign currency reserves, the Brunei investment agency manages over USD 30bn (estimated) in overseas investments. 

Economic indicators of Brunei
Economic indicators of BruneiSource: EIU

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