IMF's Views on Brunei 2010

On May 5 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brunei Darussalam.1 Background The oil and gas sector continued to dominate Brunei’s economy, accounting for about 50 percent of real GDP, 95 percent of total exports, and 90 percent of government revenue. GDP per capita (US$36,225) remains one of the highest in the world. Oil revenues are saved for future generations through a fund managed by the Brunei Investment Authority (BIA). Flexible and prudent economic management has mitigated the impact of the global economic downturn. While the economy contracted in 2008 and 2009 and the fiscal and current account surpluses declined—owing to low oil and gas production—the financial sector remained stable underpinned by a large structural liquidity, limited exposure to toxic assets, and adequate capital. Inflation remained contained reflecting the decline in global commodity prices and the continuation of price controls. Although the crisis has inevitably affected the value of external assets managed by the BIA, the market value of these assets has already rebounded significantly. The real effective exchange rate remains broadly stable underpinned by the peg to the Singapore dollar and the Currency Interchangeability Arrangement. The authorities responded proactively to the global financial crisis by increasing the implementation capacity of development projects and further reducing the corporate income tax. Through extra-budgetary funds established under the Sustainability Order of 2008, they kept some budgetary savings for strengthening the sustainability of budgetary obligations as well as for investment in public-private partnership projects to diversify from hydrocarbon sectors. In conjunction with the local banks, financial regulators developed a financial sector emergency plan and introduced a blanket deposit guarantee along with other countries in the region. Modest but stable economic growth is projected in the coming years influenced by the non-energy sector and a small increase in oil and gas production amidst improving global energy demand. Inflation is projected to remain stable at just under 2 percent. The current account surpluses are set to improve on higher oil and gas prices and a rebound in net income inflows on the recovery in foreign asset prices. The outlook depends on the strength of the global economic recovery (and concomitant movement of oil and gas prices) and the successful implementation of public investments. Over the medium term, higher economic growth could be achieved with new hydrocarbon discoveries and strong implementation of diversification initiatives. Executive Board Assessment Executive Directors commended the authorities for their flexible and prudent fiscal policy, and proactive steps to enhance financial sector stability in the wake of the global crisis. Following a mild contraction, the economy is slated for modest but stable growth in the coming years, and higher growth could be achieved through the successful implementation of diversification initiatives and sound management of oil resources. Directors noted that fiscal spending in the face of declining oil and gas revenue had cushioned the economy from the global crisis. Given subdued inflation and lackluster growth in the non-energy sector, they saw room for additional stimulus in the near term to firmly secure a return to positive growth, mainly through development spending and targeted social programs. Introducing a medium-term perspective into the annual budget process would help enhance the flexibility of fiscal policy, and set the stage for reforms ensuring fiscal sustainability and better preparing the country for the eventual depletion of hydrocarbon resources. In particular, Directors encouraged broadening the revenue base; reviewing public expenditures, including subsidies and civil service compensation; strengthening the framework governing extra-budgetary funds; and adopting long-term fiscal goals. They supported the provision of Fund technical assistance in this area. Directors agreed that the peg to the Singapore dollar serves Brunei Darussalam well. They took note of the staff’s assessment that the real effective exchange rate is in line with fundamentals. Directors commended the progress in financial sector reforms and the further strengthening of bank supervision. They welcomed the measures to prevent the build-up of a credit bubble in the household sector through curbing consumer lending and tightening regulation on credit card debt. Continued vigilance and contingency planning are warranted in the event that the impact of these measures on households turns out to be more severe than expected. Directors looked forward to the early establishment of the Brunei Darussalam Monetary Authority, a credit registry, and a deposit insurance scheme. Directors endorsed the measures to support small and medium enterprises. They encouraged the authorities to redouble efforts to promote private sector participation in areas that are currently dominated by the government. Priorities are addressing bottlenecks in business licensing and contract enforcement, and closing the compensation differentials between the government and the private sector. Directors looked forward to the completion of the privatization master plan. Directors commended the authorities for the recent statistical improvements, including the publication of Financial Soundness Indicators. They encouraged the authorities to improve the timeliness of reporting macroeconomic data to the Fund and to update the General Data Dissemination System (GDDS) metadata.

Brunei Darussalam: Selected Economic Indicators, 2005–10 Est. Proj. 2005 2006 2007 2008 2009 2010 Output and prices (Annual percent change, unless otherwise indicated) Nominal GDP (in millions of Brunei dollars) 15,864 18,226 18,458 20,398 15,340 16,971 Real GDP 0.4 4.4 0.2 -1.9 -0.5 0.5 Energy sector GDP -2.6 4.3 -6.9 -6.2 -3.6 -0.7 Nonenergy GDP 4.1 4.5 8.5 2.4 2.4 1.5 Consumer prices (period average) 1.1 0.2 0.3 2.7 1.8 1.8 Public finances: budgetary central government 1/ (In percent of GDP) Revenue 50.2 52.8 47.5 59.9 42.9 57.2 Oil and gas 45.9 49.1 42.6 54.6 37.4 51.9 Non-oil and gas 4.3 3.7 4.9 5.2 5.5 5.3 Expenditure 32.2 30.8 32.5 30.1 39.3 40.2 Current 25.9 25.3 25.1 25.2 30.6 31.3 Capital 6.2 5.5 7.4 5.0 8.7 8.9 Overall primary balance 18.0 22.0 15.0 29.7 3.7 17.0 Overall primary balance excluding royalties 2/ 18.3 22.9 15.2 29.8 3.6 15.1 Nonenergy overall primary deficit 2/ -22.6 -20.8 -22.5 -19.1 -29.2 -28.4 Money and banking (12-month percent change) Claims on private sector (end-period) 3.5 -0.9 8.6 3.7 -3.0 … Narrow money (end-period) 1.3 10.8 -2.8 13.9 22.9 … Broad money (end-period) -4.5 2.1 6.7 9.6 9.7 … Balance of payments (In millions of U.S. dollars, unless otherwise indicated) Trade balance 4,836 6,026 5,677 8,281 5,061 5,571 Exports 6,249 7,608 7,668 10,721 6,895 8,200 Of which: Oil and gas 5,886 7,327 7,373 10,344 6,563 7,860 Imports 1,413 1,582 1,991 2,440 1,835 2,629 Services (net) -494 -468 -503 -539 -594 -703 Income (net) 3/ 1,067 1,308 1,488 1,226 933 1,062 Current transfers -376 -404 -430 -446 -447 -461 Current account balance 5,032 6,462 6,232 8,523 4,952 5,468 In percent of GDP 52.8 56.3 50.9 59.1 47.0 45.7 Gross official reserves 4/ 492 514 667 751 1,357 1,383 Foreign exchange cover of currency issued (in percent) 4/ 101.8 95.3 106.2 110.9 110.9 110.9 Brunei dollars per U.S. dollar (period average) 1.7 1.6 1.5 1.4 1.5 … Sources: Data provided by the Brunei authorities; and IMF staff estimates. 1/ On a calendar year basis; excludes interest and investment income. 2/ Excludes collection and disbursement of royalties and capital transfers. 3/ IMF staff estimates. 4/ Includes Brunei Currency and Monetary Board's foreign exchange assets, SDR holdings, and reserve position in the IMF.