Brunei Darussalam: Some Recent Economic Developments

2005

AVM Horton

Negara Brunei Darussalam (NBD) remains an amalgam of deep conservatism and rapid modernisation. The conservatism is evident for example in the political and religious spheres. The modernisation can be found particularly in the oil industry, which from time to time has been at the forefront of global technological advances. Although there has been no fundamental shift in the domestic economy during the third quarter of 2005, there have been some notable developments nevertheless.

One factor, which is unlikely to change for some time yet, is the sultanate's dependence upon hydrocarbons. The price of crude oil averaged US$50.43 per barrel during the first quarter of 2005 compared with US$35.59 per barrel a year earlier, whilst the value of liquefied natural gas (LNG) rose from US$4.67 per million BTUs to US$5.23 during the same period. Current oil production is around 207,000 barrels per day (BBO 8.10.05), compared with a limit of 150,000 bpd imposed for conservation reasons in 1987 (M Cleary and SY Wong, Oil, Economic Development and Diversification in Brunei Darussalam, 1994:43). Given the state of the market at present, this increased level of output is sensible. Meanwhile, on 15 June 2005 Brunei LNG Sendirian Berhad delivered its five thousandth cargo to Japan since the industry commenced nearly thirty-three years earlier. The company supplies around eleven per cent of Japan's total demand for LNG imports, the buyers being Tokyo Electric Power, Tokyo Gas, and Osaka Gas (BBO 8.10.05).

Bidding has been opened for two onshore petroleum blocks in NBD, with the successful candidates scheduled to be announced in early 2006. 'Block L' covers a large part of the Brunei-Muara, Tutong, and Temburong Districts, whilst 'Block M' comprises the southern portion of Belait District relinquished to the government by the Brunei Shell Petroleum Company (BSPC) at the end of 2003 (GBOW ON 30.8.05). Several companies are reported to have expressed interest in making offers. It is understood that three or four years of exploration will be required before any oil is likely to be produced (BBO 16.9.05).

Meanwhile, NBD has emerged as a leader in 'smart field technology' after the BSPC installed one of the world's most advanced platforms in forty fathoms of water at the Champion West site. The oil reservoir there is reportedly 'one of the sultanate's largest undeveloped resources' and could support national oil and gas production 'for the next twenty years' (the latter being the standard formula for almost any oil discovery in the sultanate, dating back to the 1930s). Several cutting-edge technologies are being used, such as long horizontal 'snake wells'. The platform is unmanned but engineers in the BSPC's Head Office will be able to monitor events through a computer-controlled system. The upshot should be the recovery of a higher proportion of the available oil reserves coupled with lower development costs. The platform was installed at the end of July 2005 and drilling is expected to commence in October (BBO 10.9.05).

Overall NBD's economy grew by 2.6 per cent in the year between April 2004 and March 2005, but the first quarter of 2005 showed a contraction of nearly one per cent compared with the last quarter of 2004. The size of the economy in Q1/2005 was NBD$1,173.1 million (BBO 19.8.05, citing the Brunei Economic Bulletin). Economic growth was supported by an improvement in various sectors, such as forestry, construction, wholesale and retail commerce, restaurants and hotels, and transport and communications. Although there was a slight downturn in the non oil sector during the first quarter of 2005, the growth witnessed in the last two quarters of 2004 was forecasted to resume in the near future (BBO 19.8.05).

Noting that the country's economic performance had benefited from high oil and gas prices, the International Monetary Fund estimated NBD's primary budget balance at a surplus of sixteen per cent of GDP during financial year 2004-05, compared with a deficit of seven per cent in 2002. The IMF commended NBD's prudent policies and encouraged the institution of a medium-to-long term fiscal strategy, particularly with the aim of reducing oil-related risks to sustainability. Further recommendations were a more realistic oil price assumption (less conservative and closer to market projections) in the budget and an explicit recognition of the policy of saving windfall revenues (GBOW ON 4.10.05).

Attracting foreign direct investment is one of the sultanate's economic diversification plans. During 2004, however, incoming FDI totalled only US$103 million, a paltry figure set against the US$1,035 million recorded in 2002 and the US$2,000 million in 2003. Good opportunities for FDI exist in the Sungai Liang petrochemical project and at the Pulau Muara Besar Industrial Park (BBO 6.10.05). Another potential area for investment is the fish-processing sector, which is operated on a relatively small scale at the moment (BBO 6.10.05). Meanwhile, in an effort to boost small businesses, the Brunei Economic Development Board is setting up its first SME Innovation Centre, scheduled for completion in April 2006 (BBO 10.9.05).

One particularly interesting development was an agreement on 26 September 2005 to launch Islamic bonds known as sukuk al-ijarah. This arises out of the prohibition of riba, which means that Syariah-compliant alternatives to conventional financial instruments have to be found. The contracting parties are BLNG, the Islamic Development Bank of Brunei (IDBB), and IDBB Sukuk Inc. The initiative was also in line with NBD's aspiration to become an international financial centre. It is hoped that the bond will raise NBD$100 million over six years with 'profit payments' to be made half-yearly to investors. The IPO closes on 14 December (BBO 27.9.05).

On 10 October 2005 BruNet, a local internet service provider, celebrated its tenth anniversary. A joint effort by the Brunei Telecommunications Department (JTB) and Universiti Brunei Darussalam, BruNet currently has more than sixteen thousand subscribers, including 5,300 broadband clients (BBO 11.10.05).

The rapid growth of telecommunications technology in NBD was further demonstrated by the launch of third-generation mobile telephony. B-Mobile Communications Sdn Bhd, a joint venture between Telekom Brunei Berhad and QAF Comserve, was awarded the nation's second mobile licence on 1 February 2005. A two-month trial, based on wireless code-division multiple-access (WCDMA) technology, took place in mid-2005. Formally launched by HRH the Crown Prince on 2 September, the 3G system is expected to bring in facilities such as video calls, mobile television, and high-speed data communication (BBO 2&3.9.205).

As highlighted in the February 2005 issue of Asian Analysis, the NBD garment industry has been experiencing difficulties following the demise of the Multi-Fibre Agreement. Hence Brutex Manufacturing Company Sdn Bhd and its board of directors was charged in court on 26 September with failure to pay several months' wages to some of its foreign employees. The defendants, who include a former government minister, face sixty-six charges. Brutex claimed to be 'a victim of the problems facing the garment industry' (BBO 27 & 28.9.05).

Inflation is well under control: as at May 2005 the CPI was increasing at an annual rate of only 1.2 per cent, although there were complaints that the prices of essential foodstuffs had risen (BBO 29.7.05). Some retailers found that consumers were being more careful with their money. On the other hand, car sales (an indicator of economic well-being) remain buoyant, one expert forecasting that they might reach thirteen thousand this year (BBO 8.10.05).

NBD maintains the same rank (thirty-third) as last year in the UNDP Human Development Index for 2005. The sultanate's GDP per capita (US$19,210) is the 29th highest in the world. The average lifespan is 76.4 years whilst the adult literacy rate stands at 92.7 per cent (BBO 14.9.05). Bandar Seri Begawan was rated ninety-seventh in a study of 127 world cities by the Economist Intelligence Unit (BBO 8.10.05). One minor caveat needs to be entered: BSB is not yet a 'city', albeit such status is being sought by 2010 (PBA 12.10.05:1).

In short: oil and gas industries are booming, advances are being made in Islamic finance, third-generation mobile telephony is coming on stream, inflation is under control, car sales are going very well, and by world standards a good quality of life is enjoyed, but incoming FDI is somewhat disappointing and the garment industry is in trouble. The overall modernisation of the economy looks set to be combined for some time to come with strong resistance to change in other aspects of life in the sultanate.

WATCHPOINT: The development of Islamic banking and finance in the sultanate.

 

About our company:

AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.

Go to top