Brunei Darussalam: Diversification High Stakes

The Oxford Business Group had the following news update on Brunei on 25th July 2014:

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Economic Update
High stakes for Brunei Darussalam diversification 

Brunei Darussalam | 25 Jul 2014

International agencies and local officials are warning that Brunei Darussalam must remain firmly focused on diversifying its economy away from a declining energy sector and on improving its human capital if it is to achieve sustainable growth in the medium term.

In a consultation document on July 9, the IMF said that GDP growth would reach 5.8% this year, after contracting 1.8% in 2013 due to the slowdown in the energy sector, noting that energy sector growth will slump to 0.6% in 2015 before recovering to 4.3% a year later. It forecast non-energy growth at 4.8% in 2015, falling back to 2.7% in 2016.

However, the IMF observed that the Sultanate, the fourth largest oil producer in Southeast Asia, remains dependent on oil and gas revenues to keep its economy afloat. It blamed "longer-than-expected maintenance of hydrocarbon facilities" for a slump in energy revenues in 2013, but also added that the energy sector would "rebound as production of hydrocarbons recovers".

Figures released by the Department of Economic Planning and Development Board (JPKE) on June 25 also pointed to the energy decline, with oil and gas sectors shrinking 10.3% in the first three months of the year. The JPKE recorded an 8.7% slide in the industrial sector due to a slowdown in manufacturing industries, and a 14% drop in the exports of good and services.

Inflation has remained stable with the IMF noting that consumer price inflation was contained at 0.4% in 2013, but said this was a result of the continued appreciation of the Singapore dollar, to which the Brunei dollar is pegged.

In search of new industries

Under the development plan Vision Brunei 2035, the country has put the emphasis on accelerating economic growth to a target average annual rate of 6% by increasing productivity, which it must achieve by becoming less reliant on the oil and gas sectors.

The IMF said while continued tightening of regulations would secure mid-term growth, "over the longer-term, careful fiscal planning and diversification away from hydrocarbons, while fostering private sector development, are key to employment creation and long-term sustainable growth."

Other financial institutions have expressed similar concerns about Brunei's reliance on oil and gas, which account for more than 60% of GDP and in excess of 90% of exports.

"It is urgent to foster the development of other high value-added manufacturing and services sectors," said the OECD in its Economic Outlook for Southeast Asia, China and India 2014.

The government has targeted a number of key sectors such as halal manufacturing, ICT, agro-industrial and the creative technologies.

“In terms of attracting foreign direct investment, Brunei has continuously prioritised sectors other than oil and gas especially in the key clusters of food, pharmaceuticals and cosmetics, renewable energy, data centres and disaster recovery centres,” Dato Ali Apong, Deputy Minister, Prime Minister’s Office and Chairman of the Brunei Economic Development Board (BEDB) told OBG.

“In recent months, we have garnered encouraging responses from foreign investors and in April 2014 we signed the land lease agreement for the establishment of a $50m carbon steel pipe manufacturing plant by Huludao City Steel Pipe Industrial Co. from China,” he added.

South Korean firm DongYang GangChul also unveiled plans in June to build a $107m aluminium manufacturing plant in Brunei. Meanwhile Simpor Pharma, a joint investment company between Canadian Viva Pharmaceutical, private equity fund Aureos (Brunei) Capital Sdn Bhd and a group of local investors, has set up a $26m facility to produce halal pharmaceutical products.

“In order to support the operational framework for such export-oriented projects, BEDB is also prioritising foreign direct investment in logistics services,” said Dato Ali Apong.

There is significant interest in the West to back Brunei's diversification. Britain, for example, said in February it wanted to assist the Sultanate with training, technical education and enhancing engineering skills, both in the energy sector and more broadly. The Netherlands said in April it was keen to contribute investment and know-how, with the maritime sector being a possible area for cooperation.

Investing in human capital

In its report, the IMF also noted the need for Brunei to create a productive labour force to help support successful diversification. "Active policies are needed to promote private sector employment and increase incentives to pursue higher education and training," it said.

The Brunei Times quoted local sources saying in May that better coordination and management of human resources in government and private sectors are essential in overcoming the so-called "brain drain" in Brunei, and that more people need to contribute in the local workforce.

Similar to many countries, Bruneian professionals are choosing to live and practice their skills abroad where they can earn a higher salary, according to international media. Doctors, lawyers, engineers and architects and also graphic designers, ICT professionals, media and communications graduates who are seeking 'to gain relevant experience abroad’ don’t return, according to a report in Invest Vine in October.

Saiful Hazmi Hj Sulaiman, an officer from the Ministry of Industry and Primary Resources (MIPR), floated the possibility of establishing a national planning board for human resources to help tackle the issue.

"Most agencies have their own human resource planning, but what they lacked is coordination among them, (and) what needs to be carried out is to 'negotiate' and cooperate among them," he told an executive development programme for middle management officers.

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