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Middle EastAugust 1 2004

Brunei diversifies to sustain growth

Oil has made Brunei a wealthy country. However, if the current economic growth is to be maintained, the tiny Asian sultanate requires a wider spread of industries contributing to its income. Simon Montlake reports.
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For many developing economies in Asia, the spike in oil prices in the first half of the year has dampened growth prospects and served as a reminder of the region’s dependence on imported fuels. While Americans fret over higher gas prices, it is worth noting that half of all crude exported from the Middle East goes to Asia, where demand continues to soar.

But for the tiny oil-rich Islamic sultanate of Brunei Darussalam (Abode of Peace), which first tapped ‘black gold’ in 1929 during British colonial rule, this year’s higher oil prices spell reward – and opportunity. The energy sector accounts for 90% of export revenue and 53% of overall economic output, making current conditions conducive to another year of solid growth at home.

Brunei’s GDP, already among the highest in Asia on a per capita basis, was estimated to have grown by 3.7% in 2003. Its population of 340,000, which includes large numbers of foreign workers recruited in Asia, enjoys high living standards and generous government hand-out. Unlike neighbouring Indonesia, where mineral wealth has often been frittered away, Brunei has plenty of reserves and investment capital to hand.

Wider view

However, Brunei’s leaders are determined not to place all their eggs in one basket, not least because of the reality that all oil fields eventually run dry. Although consumption-led growth in the private sector and housing expenditure contributed to last year’s GDP growth, the government continues to depend on the energy sector for over half of its income. Indeed, Brunei is notable in Asia for not levying any income tax on its population.

The watchword is diversification: nurturing new businesses while continuing to invest in new energy fields and processing capacity. With steady guidance from Sultan Hassanal Bolkiah, the country’s long-serving monarch, who celebrated his 58th birthday in July, Brunei is taking a closer look at prospective investment opportunities. Its industrial strategy also has a socio-economic aspect, as the country’s skilled workforce seeks alternatives to government service.

Officials say there are several prospects in the pipeline, including a range of downstream industries that leverage on Brunei’s ample oil and gas output. Two large industrial sites have been created for this purpose, and there are also plans to develop a deep-sea port capable of handling the next generation of supertankers and offering trans-shipment facilities. One project that is being watched closely is a possible aluminum smelter that Alcoa is developing.

Slow progress

Observers say the diversification strategy has been slow to gain traction, leaving some wondering if Brunei is being too cautious in reaching out to investors. Others argue that the country’s small private sector needs more opportunities to spread its wings, and say the government’s overreaching role is hampering entrepreneurship. A plan to privatise the state telecom company was dropped after workers reportedly objected to losing their government employment rights.

Pehin Mohammad, who earlier this year took over the chair of the Brunei Economic Development Board, argues that the pace is proportional to the size and importance of the task the country faces. “We’re doing our very best to speed things up, but you have to do it the proper way. What we’re trying to do is introduce world-class industries so you shouldn’t try to rush things through and botch up everything,” he says.

Behind the caution lies the troubled story of how Prince Jefri Bolkiah, the Sultan’s younger brother, went on a spending spree in the 1990s that ended in ruin and rancour. Brunei sued Prince Jefri in 2001 for misappropriating $15bn intended for foreign investments and a settlement was later reached out of court. Given such a debacle, Brunei is determined to make sure its future investments deliver more benefits to its people.

Financial centre

Another sector earmarked for growth is financial services. Brunei has introduced a raft of regulations for offshore banking and has begun promoting itself internationally as an Islamic finance centre. Onshore banks are also thriving in Brunei, as consumer finance becomes more sophisticated and retail books begin to bulge. Personal loans now account for almost two-thirds of all lending, while car finance remains buoyant.

However, commercial lending has failed to keep pace over the last two years. Bankers say the country’s oil income hasn’t stimulated as much domestic activity as expected, while bureaucratic hold-ups have put a dampener on construction spending and other projects. Of the Br$1bn ($590m) set aside for development spending in 2003, only Br$260m was actually spent, according to the Ministry of Finance. In the first nine months, only 73 out of 542 planned projects had been completed.

“The economy is government-driven. If the tenders are not being awarded, there’s less expenditure going into the wider economy,” said Marcus Hurry, Brunei country manager for HSBC. The construction slowdown led contractors to send home foreign workers, typically from Thailand, Indonesia and south Asia, and drew a halt to new recruitment.

However, the current pickup in energy earnings, coupled with fresh impetus for Brunei’s economic diversification plans make some bankers confident that corporate activity can be revived over the next year or two. By giving more openings for private companies, the government should be able to add another growth engine to the economy, they say.

“We should see an improvement if there’s more money injected into the domestic economy in coming years. People are waiting for diversification projects to see significant growth starting again,” says Pierre Imhof, general manager of Baiduri Bank.

“It’s an oil and gas economy that is led by government spending and it will remain like that for years, because you can’t change overnight, but strengthening the private sector will be necessary to maintain growth in coming years,” he says.

Boost for SMEs

Brunei has around 4000 small and medium-sized enterprises that are receiving more attention from both government agencies and private lenders. Bankers say this sector should make gains in future as more oil wealth is ploughed into the local economy, particularly if downstream industries require contractors to build up operations. Working with Royal Brunei Shell, which has a long history in Brunei, HSBC has introduced a sponsorship scheme for small businesses.

One obstacle for private companies in Brunei is human resources. Many find it hard to recruit and retain local workers, who are lured by secure government jobs with generous benefits. But as the fruits of the national diversification strategy begin to drop, it is hoped that employees will see a brighter future in the private sector.

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Read more about:  Asia-Pacific , Brunei , Middle East