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Asia-PacificJune 1 2015

Brunei's banks unperturbed by oil price drop

Hydrocarbon resources account for more than 90% of exports and more than 50% of gross domestic product in Brunei. But, thanks to the country's historical surpluses and government's spending discipline, it has weathered the storm of falling oil prices relatively well, with local banks remaining in profit and even eyeing growth.
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Though Brunei is one of the countries most heavily reliant on its oil and gas sector worldwide, the government’s accumulated surpluses and reserves place it in one of the more comfortable positions in dealing with the 50% drop in oil prices that started in 2014. On top of this, it has a substantial stabilisation fund.

Local banks also remain optimistic given the excess liquidity they have built up over the years, and the faith of market participants in a government that has the means, experience and discipline to minimise blows to the economy.

Testament to Brunei banks’ relaxed attitude is their unaffected expansion plans, which involve transitioning into even more sophisticated institutions and planning their first ever expansions outside of the country's borders.   

No worries

Brunei’s economy has been dominated by the oil and gas industry for the past 80 years. Hydrocarbon resources account for more than 90% of exports and more than 50% of gross domestic product. Today, Brunei is the fourth largest oil producer in south-east Asia, and the ninth largest exporter of liquefied natural gas in the world, according to the Brunei Economic Development Board.

Up until the state budget release in April 2015, Brunei was running on the highest budgetary surplus in the world, at about 14.3% in 2014, according to the World Bank. But in April, the government announced that it expects to run into a $2.28bn deficit for fiscal year 2015, due to the drop in oil prices.

Javed Ahmad, managing director at Bank Islam Brunei Darussalam (BIBD), remains optimistic, as the country has previously sailed through more perilous drops in oil prices. “In 2009, we had a major correction in oil prices far more drastic than what we are going through now, even if it was short lived. We have also gone through a difficult period in the early to mid-1990s when oil was near $10 [a barrel] for long periods of time. We have learned what to do in those situations,” he says.

Bridging process

The announcement of a considerable infrastructure project – the Temburong Bridge, which will connect the main part of Brunei to Temburong province, a route currently separated by Malaysian soil – after oil prices had dropped significantly in early 2015 is a demonstration of the country’s strength, according to Mr Ahmad.

Market participants believe that Brunei’s proven budgetary discipline, even during good times, is further guarantee of its ability to handle the current situation. “Even when oil prices are high and there is pressure on government expenditure to rise, the government has maintained budget discipline. Once you increase expenditure, it is virtually impossible to cut it again,” says Mr Ahmad.

More positively, market participants do not expect oil prices to be at troublingly low levels for long. According to Pierre Imhof, CEO of Baiduri Bank, if the country takes steps to stabilise and increase its oil production again, the drop in revenue will only last for a very short period of time.

“Considering the huge surpluses Brunei has, the state might keep a rather stable or aggressive budget even if it means covering some deficit with other sources for a short period of time. If that is the case, I believe the local economy will not suffer much, nor will the local banking sector, since it focuses heavily on the domestic economy,” says Mr Imhof.

Local bankers believe that if oil prices stabilise at about $50 to $60 per barrel and increase, as expected, to $70 to $80 longer term, the country will remain in a comfortable position. 

A welcome push

There are those who think that the drop in oil prices could prove to be beneficial. Though the diversification of Brunei’s economy, away from its enormous oil and gas sector, was already under way, analysts believe that the oil price drop could push this policy further. “The pace of diversification has not been as fast and successful as hoped. But, we have seen an acceleration of the pace of diversification projects. This drop in oil prices may push the authorities and bodies involved further in this diversification process,” says Mr Imhof.

Promoting private sector growth will be key in an economy where public infrastructure investment has historically been significant and has increased imports, which has tended to result in profits leaving the country rather than spurring domestic growth. “The private sector has to play a far more important role to ensure the economy is more dynamic rather than purely relying on public expenditure,” says Mr Ahmad.

Despite the oil price drop and new regulation in 2013, which capped interest rates for loans at 4.5% a year, the two local Brunei banks, BIBD and Baiduri, are still performing strongly, especially as they benefit from significant liquidity. “One of the characteristics of Brunei banks is that they have a lot of excess liquidity because, being in an oil and gas-focused, rich country, there are significant surpluses; banks have liquidity and they are extremely keen to re-inject it by lending in the domestic economy,” says Mr Imhof.

Baiduri – the conventional local bank and only Brunei institution aside from the government to be rated (at a strong BBB+ by Standard & Poor’s) – is looking to retain its three-pillar strategy, which includes corporate, retail, and small and medium-sized enterprise (SME) banking, as well as car financing through its Baiduri Finance offering. But, changes are under way in each of these areas.

In retail, Baiduri is increasingly moving toward electronic channels, offering products online and adjusting the types of bank cards on offer. Baiduri is the only Brunei bank offering Visa, MasterCard, American Express and UnionPay.

In corporate banking, Baiduri is moving from traditional financing, in the form of overdraft and trade finance lines, to more sophisticated hedging products in foreign currencies. “We can change effectively because we are small enough, we are local and the decision-making process is fast,” says Mr Imhof.

Brunei exports by product 2013

Meeting needs

Islamic lender BIBD is also focused on building its electronic and online offerings. About 60% to 70% of BIBD's services are carried out away from the branch, and 90% of these are taking place on handheld devices.

The bank is also focused on continuing its transition. BIBD was initially focused on consumer lending, then built its SME and corporate banking arm and now has developed a treasury solution business, which has a more international function and helps liquidity management.

“In a time when banking has been under stress in terms of finding new avenues of profitability, we have been able to grow our profitability with new sources of revenue,” says Mr Ahmad.

Through its products and services, BIBD is leading the charge to instil more financial independence in Brunei where, thanks to a large budget surplus, the government has subsidised its people for many basic needs. “We want to help customers start planning for their future without depending on the government by providing insurance products and long-term savings products, so that long-term needs, such as building homes and investing in pensions or children’s education, can be done more independently,” says Mr Ahmad. As part of this objective, BIBD launched its premier banking service, Perdana, in 2014.

Developing domestic capital markets would help grow wealth management services further. On this matter, Mr Ahmad says: “You get large customer participation when you have active domestic capital markets, because individuals know the companies and their fundamentals. We need to start building infrastructure to build local capital markets. That is where the real growth will take place.” 

International test

Given Brunei’s small and somewhat limited economy, a priority for both BIBD and Baiduri is international expansion. Baiduri is looking to grow in some Association of South-east Asian Nations (Asean) countries. “I cannot disclose if we have concrete projects, but it would be natural for us to be interested in countries that have commonalities with Brunei in terms of culture, society and ethnic groups, such as our directly neighbouring countries,” says Mr Imhof.

Though Qatar, the United Arab Emirates, Saudi Arabia and Kuwait remain important international markets, expanding in Asean countries in the next two years will also be more important for BIBD, due to its geographical proximity and the Asean Economic Community’s enabling policies. “We have customers based in Singapore, Indonesia and Malaysia, [including] companies in which Brunei has substantial investments. Can we go into these markets and provide a new proposition?” says Mr Ahmad. More than 20% of BIBD’s income is now sourced internationally.

Though some Asean peers fear foreign banks’ entry into their own markets, Brunei's local lenders are not worried. The country has become very competitive in its key sectors – oil and gas and finance – and local banks are used to foreign competition since the country has no exchange controls and international bankers have long been entering Brunei to service high-net-worth clients. Indeed, 30 years ago all banks in Brunei were foreign.

So despite the government announcing a budget deficit for 2015, Brunei’s reserves and stabilisation fund remain significant cushions to deal with the latest oil price drop. Local banks remain confident of navigating through this new normal virtually unscathed, as shown by their uninterrupted plans to modernise and, especially, to prepare their expansions abroad.

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