All eyes on COVID-19 recovery plans

Azlan Othman

A further decline in oil and gas prices will pose a risk to Brunei Darussalam’s economy, while the COVID-19 pandemic will affect economic growth this year due to disruptions caused by the imposition of containment and preventive measures nationwide.

This was stated in the bi-annual policy report of Autoriti Monetari Brunei Darussalam (AMBD) for the first half of 2020, in which it added that the extent of coronavirus’ impact on the economy will depend on how soon economic activities resume.

With regards to financial sector developments, the overall stability risk is expected to be elevated in the first half of 2020.

“This is mainly due to the rise in risks in the external sector, the domestic economy, offshore assets and increased credit risk in the corporate sector arising from the COVID-19 pandemic,” said AMBD. “The risks in banks’ income from offshore investments are expected to be elevated and will be closely monitored due to the high volatility in the international financial markets and very low short-term interest rates globally.”

Despite the heightened uncertainties, the agency saw resilience in the banking sector in the first quarter of 2020.

“This may be attributed to the banks’ high level of capitalisation and liquidity, manageable credit risk and effective banks’ risk management as well as the provision of comprehensive economic and financial stimulus package,” it said.

The AMBD is currently implementing initiatives under the Digital Payment Roadmap for Brunei Darussalam 2019-2025, and among them a call for the establishment of a payment hub infrastructure to enable customers to make digital payments.

The agency will take the lead in the implementation of the project by coordinating with Bank Islam Brunei Darussalam (BIBD), Baiduri Bank and Perbadanan Tabung Amanah Islam Brunei (TAIB) to ensure that the aims of the project align with other national initiatives.

As for further developments, with the issuance of the Notice on Banks’ Recovery Plan on December 20, 2019, all banks are now required to submit their recovery plans to the AMBD by September 30 this year as an ongoing effort by the agency to develop a wider recovery and resolution framework for identified financial institutions.

The transport – especially aviation – and tourism sectors will be particularly affected, it said. As a result, “the credit risk of borrowers related to these sectors is expected to be elevated for the immediate term”.

However, the AMBD is positive that the impact on the country’s overall economy is expected to be moderate as transport and tourism sectors constitute a small portion of the economy.

The average consumer price index (CPI) rose by 1.4 per cent in the first quarter of 2020, driven by an increase in prices of insurance products and higher prices of contract catering services.

Inflation in 2019 was -0.4 per cent, in line with AMBD’s forecast of -1.0 per cent to zero per cent. However, for the remainder of the year, it is expected to be higher than initially anticipated while the increasing trend in the prices of a variety of items in the CPI basket is larger than expected, and is likely to continue for the rest of the year.

This upward pressure may be partially offset by global inflation, which is expected to be softer than initially anticipated, with some downside risks to domestic prices from the impact of COVID19 in the country.

AMBD’s inflation forecast for 2020 has been revised up to the range of one to two per cent. However, the agency cautioned that there are considerable uncertainties surrounding the forecast as it depends on the duration and intensity of the health crisis, thus its impact on inflation both domestically and globally.

The agency also stated that the Monetary Authority of Singapore further eased its exchange rate-based monetary policy at the end of March by adopting a zero-appreciation rate of its policy slope with a lower midpoint of the policy band.

Given Brunei dollar’s one-to-one parity to Singapore dollar, it said, the implied exchange rate passed through to domestic inflation will remain neutral.

“AMBD will continue to closely monitor the development of the COVID-19 situation and remain engaged with financial institutions to ensure necessary steps are taken for the well-functioning of essential financial services,” the report said. “We stand ready to implement additional measures, as and when necessary, to safeguard the financial stability of Brunei Darussalam.”