Thinking of its future

Mar 19th 2008
From The Economist Intelligence Unit ViewsWire

Brunei gets ready for when the oil and gas run out

With oil at over US$100 a barrel and the US dollar tumbling against major currencies, two of the biggest global economics stories of recent weeks seem of obvious interest to oil-rich Brunei. Crude oil accounts for almost two-thirds of the sultanate's export revenue (and natural gas for most of the rest), so in principle high oil prices mean an economic bonanza. The immediate problem, of course, is that a weak US dollar—the currency in which most oil trade is conducted—is reducing the value of oil shipments in local-currency terms. Yet despite the potential short-term impact on oil exporters' margins and tax revenues, what really worries the government is the long-term picture: namely, how the economy will support itself when the sultanate's hydrocarbon reserves run out. The government continues to explore ways of "future-proofing" the economy, and early 2008 has seen some further developments on this front.

Wawasan 2035

In late January the government unveiled its first long-term national development plan, dubbed Wawasan Brunei 2035 (Vision Brunei 2035). Policymakers already use shorter-term five-year plans, but Wawasan Brunei 2035 has a particularly vital role in view of the government's concerns about the economy's unhealthy dependence on oil and gas. Currently, the energy sector accounts for 94% of government revenue, 96% of exports, 74% of investment and 69% of GDP. Over the next 20 years or so Brunei's oil reserves are expected to run out, while in around 30 years the country's natural-gas resources will be depleted. Consequently, without a successful transition to non-energy-based industries and services, a much less pleasant future for Brunei could await.

Wawasan Brunei 2035 focuses on the need to find a sustainable path for the non-oil economy. The plan also aims to raise the sultanate into the ranks of the top ten nations in the world in terms of GDP per head by 2035. (Brunei is already in the top 30 globally.) Wawasan Brunei 2035 aims to produce an administration devoted to the task of safeguarding the sultanate's long-term future. Education will also play a key role, focusing on information technology. Small businesses need to be encouraged, and investment needs to be fostered in downstream petrochemical production and other industries. The government also hopes to develop tourism, and is targeting a 50% increase in tourism-related employment by 2010.

As part of its plans, the government is seeking to promote industrial investment in non-energy sectors. In late January a large aluminium producer, Alcoa of the US, signed a memorandum of understanding (MoU) with the Brunei Economic Development Board (BEDB) to extend studies into the feasibility of establishing an aluminium-smelting plant in the sultanate. The two sides also signed a separate MoU on setting up a small-business development scheme that will help local entrepreneurs to take advantage of business opportunities presented by Alcoa's smelter investment.

The BEDB also held an investment forum in Singapore in February. Although energy-related investment, for example in petrochemicals, remains very much on the agenda, other sectors are gaining a higher profile. The government's plans include developing a container terminal on Muara island, along with an export-processing zone and a manufacturing zone. The BEDB also wants to promote Islamic business, from halal food production to Islamic finance.

A nice idea, but will it work?

While the government seems to understand what needs to be done to secure the sultanate's long-term future, bringing it about in an orderly fashion could be difficult. The sultanate's belief in its tourism potential is a case in point. Brunei has ecotourism potential, but a conservative Muslim country with strict laws on alcohol might have difficulty in fulfilling the potential offered by its natural landscape and tropical climate.

Similarly, although the government has enough money to improve infrastructure and even to provide inducements to large overseas companies to locate production facilities in Brunei, the success of its plans is not assured. The Sungai industrial park seems to be going ahead on schedule, and has attracted substantial investment in the construction of a methanol plant, with a number of other large investment projects also under consideration. But the port development at Pulau Muara Besar—which is key to the government's aim of creating thousands of jobs—will compete with established transshipment hubs nearby, such as Malaysia's Port Klang and the Port of Singapore. As for hopes that financial services could fill the gap, even if the sector were to grow strongly (possibly helped by an expansion in Islamic banking), it would not be large enough to raise GDP growth substantially.

More generally, the development of Brunei as a non-energy-based economy will require a transformation of the tax system, and probably a large number of concomitant changes in the relationship between the state and ordinary Bruneians. Successfully implementing these sorts of changes is probably a greater challenge for the sultanate than attracting investment.

Conservation strategy

Another side to the government's efforts to future-proof the economy is to promote energy conservation. Brunei can't replace its hydrocarbon reserves once they are exhausted, but it can try to delay the day when they run out. The energy minister, Yahya Bakar, has emphasised the need to conserve energy. In February he urged Bruneians to change their lifestyles and prepare for a future when the country's oil and gas reserves are depleted. The government caps oil production at 200,000 barrels a day in order to prolong the benefit to the sultanate of its energy reserves, but in the medium term, said Mr Bakar, the Bruneian population will have to adopt a simpler, less energy-intensive lifestyle. However, one of the reasons why Bruneians have become complacent about energy resources is the fact that retail fuel prices are subsidised by the government, and this is unlikely to change in the foreseeable future.

Political dimension

The prospect of Brunei's economy undergoing a structural shift is also a political issue, carrying as it does the potential to stir up social unrest. Political activity is negligible for now: Brunei lacks a democratically elected legislature, and power is concentrated around the office of the sultan. Moreover, the sultan is not under any discernible pressure from the population to speed up political reform, in large part because living standards are high and because the country's oil wealth allows the government to provide jobs and healthcare without levying an income tax. The political quiescence of the population is probably further explained by the fact that Brunei's neighbours are mainly less prosperous South-East Asian economies.

However, in the long term the depletion of oil and gas reserves will make it more difficult for the government to provide the large range of benefits that Bruneians have come to expect. This may increase popular demand for a more accountable government, and thus for democratisation.