A combination of tighter fiscal planning, a gradual increase in hydrocarbons prices and an improved performance by some non-oil sectors saw Brunei Darussalam shake off two years of contraction and lay the foundations for stronger growth in 2017.
Budgeting for the new year
The budget for FY16/FY17, which came into force on April 1, laid out total spending of B$5.6 billion (US$3.9 billion), US$100 million less than the previous financial year.
The plan targeted spending on areas seen as facilitators of economic growth and development. Infrastructure investments accounted for nine per cent of all spending at B$523.56 million (US$368.9 million), while education received the second-highest sectoral allocation, at B$726.65 million (US$511.9 million). The only sector to receive an enhanced budget was defense, with B$564 million (US$397.3 million), a rise of 4.7 per cent over 2015/16.
Spending was pared back in many other areas due to the need for prudent spending amid lower oil revenues. Among the departments that saw the biggest reductions were the Ministry of Primary Resources and Tourism – which received B$57.14 million (US$40 million), a 30.5 per cent decrease on the previous year – and the Ministry of Development, whose allocation was reduced by nearly 21 per cent year-on-year (y-o-y) to B$234 million (US$163.7 million). The budget for the Prime Minister’s office was also curtailed by 20.8 per cent, though at B$566 million (US$398.8 million) it represented the third-largest outlay in the budget.
In a statement issued at the end of September following its Article IV review consultations with the government, the IMF reported that the budget had provided an appropriate target for fiscal adjustment, but noted that it needed to be buttressed by tight spending controls, increases in non-oil revenue and improvements in public financial management.
Along with measures to address wage distortions and increase the attractiveness of private sector employment, the report said further steps were needed to curb state expenditure on salaries and reduce outlays on untargeted spending, including fuel subsidies.
GDP expanding but short of target
One area where the budget may have come up short was in its projections for GDP, with the government having forecast growth of 2.3 per cent in FY2016/2017, a rebound from the 1.1 per cent contraction experienced in FY15/FY16.
However, according to an IMF report issued at the end of October, the Sultanate’s GDP was expected to expand by 0.37 per cent in the 2016 calendar year, making it unlikely the budget’s financial year target will be met by the end of March 2017.
Though growth was modest in 2016, the IMF expects the economy to gain momentum this year, expanding by 3.9 per cent, before flattening to 1.7 per cent in 2018.
A marked strengthening of growth is forecast for subsequent years, with expansion of nine per cent, 13 per cent and 13.1 per cent expected annually between 2019 and 2021, when a series of new downstream energy projects are set to come on-line.
Building a better business environment
To offset budgetary cuts, the government undertook a wide-reaching reform drive to bolster the role of the private sector by improving business regulation.
These moves included the introduction of an insolvency order in September aimed at engendering “a shift in insolvency culture, with a greater emphasis placed on company rescue and rehabilitation, and protection for all creditors and debtors”, according to a statement by the Ministry of Finance.
Such reforms would appear to have had an impact, with Brunei Darussalam named “most-improved global economy” in the World Bank’s “Doing Business 2017” report – climbing 25 places on the ease of doing business index to 72nd of 190 economies.
The Sultanate posted an improvement in eight out of 10 indicators, including getting electricity, where it rose 55 places on the previous year’s index to 21st; resolving insolvency, where it moved 40 places to 57th; and enforcing contracts, where a 22-place jump to 93rd was recorded.
The higher rankings saw the country placed fourth among Asean member states – behind Singapore, Malaysia and Thailand – and 13th in the Asia-Pacific region.
Efforts to improve the business environment were also noted by the IMF in its Article IV consultation, which stated that authorities were successfully implementing measures to raise productivity, enhance efficiency and promote economic diversification.
Energy rebounds, inflation flattens
While Brunei Darussalam’s economy is diversifying, much of the country’s wealth continues to come from its hydrocarbons industry, which has seen revenues drop in recent years due to a sustained downturn in global commodity prices and lower oil production.
The gradual increase in global prices, combined with a steady rise in oil and gas output in 2016 will help support state finances, with production in both segments set to expand further in subsequent years, according to IMF estimates. Oil flow is forecast to increase from 133,000 barrels per day (bpd) currently to 137,000 bpd next year, and climb to 152,000 bpd by 2021.
Gas production is also set to rise, with output to reach 45,300 cu metres a day by 2021, up on 33,900 cu metres per day in 2016.
While several macroeconomic indicators began to show signs of improvement towards the end of the year, inflation remained subdued throughout 2016, decreasing 0.8 per cent y-o-y as of the end of November, according to most recent figures from the Department of Statistics.
The low cost of food products was a factor at play in the modest inflation rate, partly due to higher output from the agriculture industry, which posted 6.8 per cent growth in the first quarter.
This Brunei Darussalam economic update was produced by Oxford Business Group.