Brunei economy projected to expand by 2.8pc

Azlan Othman

Brunei Darussalam’s economy is projected to expand by 2.8 per cent in 2021, after growth had slowed to an estimated 0.7 per cent in 2020. Growth in 2021 is expected to be largely supported by the mining and manufacturing sectors, as external demand strengthens.

This was stated by the Centre for Strategic and Policy Studies (CSPS), which has just released its Brunei Economic Outlook 2021 report, discussing recent key developments in the Brunei economy and the economic outlook for the year.

According to the report, the services sector is expected to rebound, but travel and tourism is unlikely to recover swiftly. The current account surplus is projected to remain high, reflecting a robust trade surplus, while the fiscal deficit is projected to narrow on an improved outlook for oil and gas prices. Inflation is expected to moderate, after a steep rise in 2020.

However, these forecasts could be derailed by a materialisation of downside risks, which includes new waves of infections, delays in the development and deployment of a safe and effective vaccine, weaker-than-expected global growth and commodity prices, and unanticipated domestic oil and gas supply disruptions.

Immediate policy priorities should focus on sustaining the public health response, supporting affected and vulnerable households and firms to revitalise growth and jobs, strengthening the fiscal position by expanding the revenue base to ensure long-term sustainability, and accelerating structural reforms to seize new growth opportunities.

The report also features brief articles on (i) How does COVID-19 affect the economy?; (ii) Brunei’s response to the COVID-19 outbreak; (iii) Cluster development and economic diversification; (iv) Oil market developments and outlook; and (v) COVID-19 vaccine progress update.

The report further added that Brunei’s economy slowed in 2020 due to weak external demand, low commodity prices, and the impact of domestic containment measures. In the third quarter of 2020, GDP growth moderated to 0.5 per cent year-on-year, after robust growth of 2.7 per cent in the first half. Growth has been largely supported by the downstream oil and gas sector, particularly the production and exports of refined petroleum and petrochemical products.

Crude oil and liquefied natural gas (LNG) exports, on the other hand, have been hampered by domestic production disruptions, as well as weak demand and prices. Service sector activity has recovered, following the gradual easing of stringent measures.

The retail trade and telecommunications sub-sectors have been particularly resilient as border closures boosted domestic spending for groceries and essential supplies, while work-from-home arrangements led to higher demand for electronic products and ICT services.

By contrast, the air transport and hotels sub-sectors have been badly hit, owing to impediments to international travel. The trade balance fell into deficit in the third quarter of 2020. Travel restrictions enforced worldwide led to lower demand for jet fuel, diesel, and gasoline. The global aromatics market has also been affected, as manufacturing activity slowed.

Meanwhile, imports of mineral fuels, used as feedstock for the production of refined and petrochemical products, surged. Private consumption and investment surged in the third quarter after containment measures were eased.

Public consumption and investment continued to be held back by sharply lower government revenue. Inflation surged in the first half of 2020, but moderated in the third quarter. Consumer prices rose significantly in the first half of 2020, due to a marked depreciation of the exchange rate and shortages of certain imported items caused by global supply chain disruptions.

The Brunei dollar has gradually regained strength against the United States (US) dollar since May. The financial sector remains sound and well-buffered. The capital adequacy ratio is well above the minimum regulatory and Basel II requirements.

Banks have ample liquidity, and non-performing loan ratios have continued to improve.

Despite pressures on earnings with a low level of intermediation, banks are profitable. Domestic lending fell sharply in the third quarter of 2020 due to a decline in credit to households, particularly in personal loans financing.

Credit to businesses has been more robust, although lending to certain sectors saw large declines. Demand deposits continue to surge, which may reflect pandemic-induced precautionary saving, spending cutbacks, and preference for holding cash to avoid liquidity shortfalls. Deposit rates have also fallen to record lows.

The fiscal deficit widened substantially in 2020, due to a plunge in oil and gas revenue. Although crude oil prices have recovered from their April lows, they remain substantially below pre-pandemic levels.

The report also revealed that private investment is also expected to drive growth this year, particularly from the Phase II expansion of Hengyi Industries’ oil refinery and petrochemical complex. The current account surplus is projected to remain high at 10.7 per cent of gross domestic product (GDP) in 2021, largely driven by crude oil, LNG, and refined petroleum and petrochemical exports as external demand firms.

The expected commencement of the production of fertilisers and increased aquaculture output will also boost exports. The fiscal deficit is projected to narrow to 9.1 per cent of GDP in 2021, after widening substantially to 15.1 per cent of GDP in 2020. Oil and gas revenue is forecast to be higher in 2021, with oil prices averaging USD50.8 per barrel and LNG prices at USD8.9 per mmbtu.

Government expenditure is expected to continue to trend lower as fiscal consolidation efforts resume. Inflation is projected to moderate to 0.4 per cent in 2021, after a steep rise to 1.7 per cent in 2020.