Gear up for a challenging year ahead

Azlan Othman

With oil and gas prices expected to decline throughout 2020, the Brunei economy is facing major risks in the near to medium term.

This was said by the ASEAN +3 Macroeconomic Research Office (AMRO) in its ASEAN +3 Regional Economic Outlook report this week, days after the Asian Development Bank (ADB) also reported similar findings.

AMRO said, “Given (Brunei’s) large dependence on the oil and gas sector for gross domestic product (GDP) growth, fiscal revenue and exports, risks can arise from domestic and external factors to affect the economy through several channels.

“Domestically, the risks are mostly related to unforeseen disruptions to oil and gas production from mature fields; and potentially lower production in downstream activities.

“Externally, expectations of a sharp slowdown in the major economies from the COVID-19 pandemic – potentially amplified by any resumption in trade tensions – could lead to sustained, significantly lower oil and gas prices.”

Consolidation efforts have reduced total government expenditure by 6.9 percentage points of GDP since FY2016/17. In 2019, oil and gas prices were considerably lower than those in 2018 and are expected to decline throughout 2020, which is expected to result in a budget deficit in the financial year of 2019/20, according to the report.

Slower momentum in economic diversification, the research group believed, could dampen medium- to long-term prospects while a delay in large foreign direct investment (FDI) projects could negatively impact the near-term outlook.

AMRO said while “considerable progress has been made to diversify the economy but challenges remain, in particular, the heavy reliance on the oil and gas sector”, the group believed that further structural reforms and diversification momentum “would enhance the growth potential of the Brunei economy, even with declining oil and gas production in the future”.

It noted that after returning to positive growth in 2017, the economy experienced several quarters of low or negative growth in oil and gas production as a result of ongoing maintenance and rejuvenation work. Despite the contraction in the first quarter of 2019, the economy grew significantly in the remaining three quarters and recorded growth of 3.9 per cent in 2019.

“The rebound in economy was mainly attributable to enhanced oil and gas production, which was boosted by the commencement of Hengyi’s refinery production in November 2019,” the AMRO report said. “It was further supported by strong growth in the services sector, especially finance, wholesale and retail sub-sectors.”

Consumer price inflation, it said, has remained low and fallen into the negative territory since the beginning of 2019.

The research group also said the Sultanate’s external sector remained strong despite the decline in the current account surplus in recent years.

“Export growth increased sharply in 2018 on the back of higher-than-average commodity prices,” it said. “Amid a decline in oil and gas prices, exports were still growing quite strongly in 2019, underpinned by the increase in oil and gas production, especially in the last quarter when Hengyi came online.”

AMRO added, “Import growth, which saw a boost in recent years from infrastructure and large FDIs, has slowed with the near-completion of these projects. Meanwhile, the commencement of downstream operations has significantly increased imports of crude oil, especially towards the end of 2019. Overall the external position remains strong with ample foreign assets.”

The financial sector in Brunei continues to be dominated by banks, which are well-capitalised and have ample liquidity, it said, adding that the banks “have remained profitable with increased returns in recent quarters amid relatively low loan-to-deposit ratios, which have been increasing in recent quarters because of a recovery in credit demand”.

While the fiscal position has improved in recent years, “the budget is anticipated to remain in deficit”, from a deficit 12.9 per cent of GDP in the financial year of 2017/18 to a surplus of 0.2 per cent of GDP in the following year, “on the back of higher oil and gas revenues and continued restraint in fiscal spending”, it said.

Meanwhile, ADB in its annual Asian Development Outlook (ADO) report this year said with the completion of larger refinery projects in Brunei last year, investment may take a breather but exports of oil and petroleum products will increase.

In November 2019, the report continued, Brunei began exporting petroleum and gas products, mainly automotive diesel, their value rising from USD205 million that month to USD357 million in the following month.

“The Hengyi refinery production was expected to run in full capacity starting in the second half of this year, and Brunei Fertiliser Industries’ ammonia and urea production plant was scheduled to start operations in the second quarter of 2021, though volatile oil prices and the spread of COVID-19 have slightly dimmed the outlook,” it said.

GDP, nonetheless, is still expected “to continue to grow above trend, albeit at a slower pace of two per cent this year before rising to three per cent in the next year”.