Brunei Darussalam’s economy is expected to strengthen in 2021 and 2022 on an improving external environment with a gross domestic product (GDP) growth of 2.5 per cent this year and three per cent next year, according to the Asia Development Bank (ADB) flagship economic publication, Asian Development Outlook (ADO) 2021, released recently.
Growth in 2021 will be supported by a recovery in global demand and higher oil and gas prices, which will boost government revenue and support government consumption. Private consumption is expected to grow as the economy continues to strengthen.
The GDP is forecast to rise in 2021 and 2022, supported by robust export growth from the Hengyi plant and higher oil and gas prices. But increased imports due to the plant’s expansion and continued demand for inputs will temper the trade and the current surpluses in both years.
The main risks to the robust economic outlook are a weaker-than-expected global recovery, delays in large foreign direct investments, and unscheduled oil and gas supply disruptions.
ADB added that increased production at the Hengyi plant and Brunei Fertilizer Industries, starting production by the third quarter of 2021, will boost exports. Private investment and the construction industry will be bolstered by the building of a Halal meat processing and distribution centre and the Phase 2 expansion of the Hengyi plant, valued at about USD13 billion and expected to begin in 2021.
The plant, once completed in 2024, is projected to increase oil refining capacity to 22 million tonnes per year from the current eight million tonnes per year. GDP growth is forecast at 2.5 per cent this year and three per cent next year.
ADB also said that although growth decelerated sharply in 2020 on the impact of the COVID-19 pandemic, growth was still achieved due to the economic contribution of a new oil refinery and petrochemical plant.
The economy grew by 1.2 per cent in 2020, much lower than 2019’s 3.9 per cent growth. The government took various measures to lessen the impact of the COVID-19 pandemic, including partially funding private sector micro, small and medium enterprise (MSME) salaries, as well as deferring loan payments of individuals and businesses affected by the pandemic.
Last year’s key growth drivers were net external demand from increased exports of petroleum and gas products — mainly from Hengyi Industries starting Phase 1 of its oil refinery and petrochemical operations in November 2019 —and slower import growth due to a contraction in services imports.
Hengyi’s Phase 1 investment totalled USD3.5 billion. Fixed investment fell sharply on lower construction and investment in the oil industry. Government consumption dropped by 9.6 per cent in 2020, but private consumption rose by 7.3 per cent.
Rising production at Hengyi’s oil refinery and petrochemical plant, strong export growth, and a decent expansion in household spending offset weaknesses in other parts of the economy.
Other petroleum and chemical production increased more than four times last year. But services output contracted by 1.9 per cent, with COVID-19 travel restrictions hurting hotels, restaurants, and the travel industry.
Inflation accelerated to 1.9 per cent in 2020 from -0.4 per cent in 2019 as prices in most product categories, led by food and services, rose because of the COVID-19 pandemic. Price increases of this size were last seen in 2008, when inflation averaged 2.1 per cent.
Large volume and price declines for crude oil and liquefied natural gas affected the nominal value of 2020’s exports.
In terms of economic prospects, ADB said the near-term growth prospects are tempered by a fragile external environment as major trading partners continue to grapple with the COVID-19 pandemic.
Although the government has been successful in containing the spread of COVID-19, the progress of vaccine rollouts both domestically and worldwide will determine the economy’s strength.
Meanwhile the high inflation of 2020 is unlikely to continue in 2021 and 2022, as the easing of some supply constraints caused by the COVID-19 pandemic should put downward pressure on prices.
Although global inflation is expected to rise in 2021 on revived economic activity, price increases are likely to remain muted as overall demand remains weak. The one-to-one peg of the Brunei dollar to the Singapore dollar and the domestic price subsidies that are in place should also keep inflation in check. Inflation is forecast at 0.7 per cent for the next two years.
Brunei Darussalam is expected to continue turning a trade surplus in the near term after a surplus of USD1.3 billion in 2020. The trade surplus will continue to be supported by exports of oil, gas, and finished petrochemical products.
ADB also said that despite a positive economic outlook, the poor productivity of Brunei Darussalam’s MSMEs are a major policy challenge – and one that existed before the COVID-19 crisis.
The pandemic, however, has put their poor productivity into the spotlight, making this a policy concern for the near and medium terms. MSME’s are economically important since they constitute 97.3 per cent of the country’s 6,157 firms.
Making MSMEs more productive will involve a clear understanding of the role of human capital development, imported raw materials, sectoral diversification, and foreign-market orientation on these businesses.
The COVID-19 pandemic hit MSMEs in some sectors hard, including hotels and accommodation and food services; these activities account for 10.8 per cent of total MSME employment.
The prospects for MSME’s in the wholesale and retail trade (21.5 per cent of employment) will depend heavily on a recovery in domestic consumption. Because manufacturing MSMEs (22.7 per cent of MSME revenue) and those involved in mining and quarrying (33.4 per cent of revenue) are reliant on foreign markets, it remains to be seen how the global COVID-19 pandemic, which is still unravelling, will affect their businesses in 2021.
“The 2019 Global Entrepreneurship Index shows Brunei Darussalam lags far behind international standards of entrepreneurship, particularly in the skills needed to start a business and process innovation, Brunei Darussalam can learn a lot from the good practices of neighbouring economies.,” it said.