Challenges ahead as Brunei strives for economic diversification

Koo Jin Shen
BANDAR SERI BEGAWAN

DESPITE a recovery in GDP (gross domestic product) at the end of the first quarter this year, Brunei’s road to economic diversification remains a challenging one as some critical areas face a downturn along the way.

At the end of the first quarter of 2016, the country’s GDP at constant prices recorded a growth of 3.2 per cent in comparison to the year before where the economy shrunk by 5.2 per cent.

According to the Department of Economic Planning and Development (JPKE), the growth in GDP was due to increased oil and gas production. In its first quarter report, the oil and gas sector increased by 7.6 per cent at constant prices, following increase in oil production to 135.2 thousand barrels per day, up from 124.5 thousand barrels per day from the first quarter of 2015.

LNG manufacturing had also recorded a growth of some 12 per cent, to 1,037.7 thousand MMBtu over this period.

However at the same time, other areas in the industrial sector had posted negative growth, possibly due to cuts in government spending.

Construction fell by 17.3 per cent and the manufacturing sector outside of oil and gas (including methanol) fell across the board to varying degrees. The services sector had also dropped by 0.7 per cent, notably with concern business services by 9.5 per cent.

This indicates that economic growth is still highly dependent on the energy sector, and while increased production had off-set low prices to a certain degree, analysis from economic bodies such as the World Bank and the IMF believe global oversupply will be a persistent issue, keeping prices low for the foreseeable future.

Therefore, Brunei will need to ensure other economic sectors are developed swiftly so the country’s main economy does not continue to rely on volatile commodity prices. Some of these economic sectors have been long identified, but lacked progress in development over decades.

Now is the time to renew focus and ensure that they receive sustainable and well-thought out development, either in the form of renewed government spending, public-private partnership or direct investment, either from local firms that had accrued wealth over decades of government contracts and largess or from attracting foreign direct investment (FDI) that seek opportunity in the region.

Tourism

The country’s natural resources can help generate income from ecotourism while Islamic tourism and heritage can attract a niche market.

It is also a strong employer, with potential to generate low-skill but important job opportunities for locals in the service industry.

On a positive note, the hotel sector in the first quarter GDP report saw a small growth of 1.8 per cent, though this was after undergoing a contraction of 12.9 per cent in the year before.

At the very least, it indicates a potential for growth.

In a recent report, The World Travel and Tourism Council (WTTC) had forecasted Brunei's tourism sector to grow by 2.5 per cent in 2016, increasing the industry's GDP contribution to $322 million.

In its annual report, the WTTC predicted that the tourism sector will grow on average 7.5 per cent per annum through to 2026 to reach around $710 million or 2.3 per cent of GDP.

The WTTC estimated that tourism in Brunei supported 4,500 jobs directly, making up 8.2 per cent of the country's employment. By 2026, the industry could generate up to 7,000 jobs, equivalent to an increase of four per cent per year.

In another recent report by the Oxford Business Group, eco-tourism and tourism in Islamic heritage are two niche areas which Brunei can capitalise on, noting that Muslim travel market is expected to reach some $200 billion worldwide by 2020.

Logistics

Brunei's location and political stability offers a unique and strategic position to serve as a logistics hub to connect what is known as the East ASEAN Growth Area to the rest of the region.

With the ASEAN Economic Community slowly coming into fruition, the Trans Pacific Partnership (TPP) on its way to ratification and the Regional Comprehensive Economic Partnership (RCEP) still undergoing negotiations, the region as a whole looks poised to see a lot of cross-border trading as tariff measures are eliminated and non-tariff barriers get whittled away.

While the country has strong potential to act as a gathering point for raw materials and distribution hub for goods through this region, the logistic sector is somewhat underdeveloped. In 2015, the transportation sector contributed less than two per cent to the GDP.

In the first quarter of 2016, the transportation sector as a whole contracted across the board, land by 10.6 per cent, water transport by 27.4 per cent, air by 0.3 per cent and other transportation services by 22.6 per cent.

Changes however are upcoming, with an implementation of a free trade zone that is due to be launched sometime this year and the overall management of the main container port in Muara to be privatised instead of being run by the government.

Industry

In terms of industry, FDIs will play a key role, providing knowledge transfers, job opportunities and investment capital to Brunei.

According to data from the FDI Action and Support (FAST) Center, there are currently 13 ongoing and operating FDI projects in Brunei with a total value of $6.4 billion and providing about 2,194 employment opportunities.

The largest of these is the Hengyi Refinery, a US$4 billion investment from China that is scheduled to be operational in 2019.

Investment in the downstream industry should ensure Brunei continue its oil and gas legacy and expertise, even long after depletion of its own natural resources by importing raw materials (feedstock) from around the world to refine into exportable end-products.

Meanwhile, other FDIs are making use of Brunei's Halal Certificate to try and penetrate the Islamic market in food, medicines and cosmetics.

Simpor Pharma Sdn Bhd is one such entity, a joint investment between Canadian firm Viva Pharmaceutical Inc, private equity fund Aureos (Brunei) Capital Sdn Bhd and a group of local investors. It runs the country's first Pharmaceutical plant, with an emphasis on Halal pharmaceutical products and health supplements.


Sumber - The Brunei Times