Brunei’s growth momentum to strengthen over medium term: IMF

|     Azlan Othman     |

BRUNEI Darussalam’s economic growth and macroeconomic balances are expected to strengthen further over the medium term. The start of downstream production including from the Hengyi Refinery at Pulau Muara Besar (PMB) and Brunei Fertilizer Industries (BFI) at the Sungai Liang Industrial Park and stronger oil and gas activities will result in robust gross domestic product (GDP) growth and exports in 2019-23.

This was highlighted by the International Monetary Fund (IMF) recently when their Executive Board concluded the Article IV consultation [1] with Brunei Darussalam. IMF projected the country’s growth accelerating to 2.3 per cent this year.

IMF added that imports linked to the FDI project execution are likely to keep the current account at moderate surplus in 2018, but the surplus is expected to increase from 2019 onward. The fiscal position is also expected to recover over the medium term, but remains vulnerable to oil and gas price shocks. Inflation is expected to remain low but positive. Risks to the near-term outlook are broadly balanced, although substantial uncertainty surrounds oil and gas prices.

IMF said Brunei’s economy has been adjusting well to lower oil prices since 2014 with the authorities undertaking wide-ranging reforms. The decline in oil and gas prices led to large budget deficits and narrower current account surpluses.

In response, the authorities in 2015 launched a reform programme aimed at ensuring long-term fiscal sustainability and intergenerational equity and fostering economic diversification by improving the business climate. These reforms have started to bear fruit, as growth has begun to rebound and inflation has returned to positive territory.

IMF said real GDP in 2017 was stronger than expected, rebounding to 1.3 per cent supported by both the oil and gas and non-oil and gas sectors. Higher liquefied natural gas (LNG) and methanol production drove oil and gas sector growth, more than offsetting lower oil production, while non-oil and gas growth was mainly underpinned by the ongoing downstream construction projects. Recent data indicate that the recovery carried over into early 2018.

IMF added the Brunei authorities have made progress in implementing fiscal consolidation, adjusting financial sector regulation, improving business climate, attracting foreign direct investment (FDI), and supporting micro, small and medium enterprises (MSMEs).

From 2016 to 2018, Brunei experienced the largest cumulative improvement in the World Bank Doing Business score, particularly with a remarkable improvement in access to credit.

Major FDI projects under way in the downstream sector namely the Hengyi Refinery and BFI together with other FDI projects within other priority business clusters should contribute towards achieving the goals of more dynamic and sustainable economic growth under the Vision 2035 development plan.

The Financial Sector Blueprint articulates the authorities’ plans for the financial sector’s developments over the medium-term.

Its five pillars identify areas for action that would help foster new international financial linkages for the country and boost the financial sector’s contribution to GDP, a central component of the diversification strategy.

On another note, IMF executive directors noted that Brunei has been adjusting well to lower oil and gas prices since 2014.

The directors welcomed the rebound in economic growth and the prospects for continued recovery over the medium term. They commended the authorities for their wide-ranging reforms.

The directors noted, however, that important risks are clouding the outlook, including uncertainty surrounding oil and gas prices and production, rising protectionism and tighter global financial conditions. Against this background, they underscored the need to continue reform implementation to ensure long-term sustainability and intergenerational equity, increase productivity and competitiveness, diversify the sources of growth, and build resilience to shocks. The directors emphasised that continued fiscal consolidation is needed to bring the fiscal position closer to that required by intergenerational equity considerations. They stressed that fiscal policy reforms should focus on rationalising current expenditure, including gradually reforming fuel subsidies and containing the wage bill by streamlining the civil service, as well as diversifying revenues.

The IMF executive directors also encouraged the authorities to formalise a medium term fiscal framework and intensify public financial management reforms.

This would require incorporating subsidies and extra-budgetary funds in the budget presentation, improving management, and better monitoring of public expenditure.

IMF Directors also noted that the Brunei dollar’s peg to the Singapore dollar remains appropriate, providing a credible monetary anchor and stability to the financial system. The directors encouraged further efforts towards financial sector development, while also underscoring the need for improvement in banking regulation and supervision to preserve financial stability.

They underscored the benefits of broadening the investor base, establishing a secondary bond market, and creating a stock exchange.

The directors welcomed plans to operationalise the macro-prudential surveillance framework and supported the ongoing development of a contingency planning and crisis management framework for the banking system.

The directors commended the authorities’ efforts towards economic diversification.

They considered that sustained efforts in enhancing the business environment, supporting the growth of MSME and raising human capital would help develop the non-oil and gas and private sectors, and attract FDI.

However, further measures are needed to generate stronger positive spill-over from FDI to the rest of the economy. Support for MSMEs should also be assessed regularly.