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SINGAPORE, May 8, 2023 – Economic activities in Brunei Darussalam have picked up since mid-2022. Thanks to high vaccination rates, daily new cases of COVID-19 have declined sharply since April 2022, enabling containment measures and border restrictions to be lifted. The resumption of economic activities has provided the impetus for the non-oil and gas (O&G) sector to recover, particularly the services sector. The country has also benefited from higher O&G earnings, helping to improve the external position and restore fiscal buffers. Continuing diversification in the non-O&G sector, and faster structural reforms, will help foster resilience and put the economy on a more solid footing in the longer term.

These conclusions are highlighted in the 2022 Annual Consultation Report on Brunei Darussalam published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report is based on AMRO’s Annual Consultation Visit to Brunei Darussalam in November 2022, and data and information available up to January 2, 2023.

Economic developments and outlook

Brunei Darussalam is expected to record a negative growth of 1.2 percent in 2022. The weak growth in 2022 mainly reflects the unexpected downturn in the upstream O&G production in H1 2022. The contraction in the O&G production appears to have bottomed out, but the ongoing rejuvenation of offshore O&G fields is expected to continue to have some negative effects on growth. The outcome from the rejuvenation efforts would result in improved asset reliability and production availability. On a positive note, the diversion of domestic gas supply to the downstream activities and the recovery in the services sector have contributed to stronger performance of the non-O&G sector. Growth is expected to recover to 2.8 percent in 2023.

Inflation has risen to a multi-year high, mainly on rising food and transport prices. As a net food importer, elevated global food prices, particularly in the first half of 2022, contributed significantly to the broadening of food inflation. A spike in prices of transport services and vehicles added to upward pressure on inflation. As a result, inflation remained high at 3.7 percent in 2022 before easing to 2.5 percent in 2023.

The external position remains strong, with an estimated overall balance of payments of USD1.1 billion (6.4 percent of GDP) in 2022. This reflects a significant widening of the current account surplus (12.8 percent of GDP) amid favorable O&G prices and robust activities in the non-O&G sector. The current account surplus is projected to remain large at 9.9 percent of GDP in 2023. Surging O&G revenue means the country’s fiscal position has improved considerably. As a result. the fiscal balance shifted from a deficit of 5.2 percent of GDP in FY2021 to a surplus of 0.5 percent of GDP in FY2022 before reversing to a small deficit of 1.3 percent of GDP in FY2023.

Risks, vulnerabilities and challenges

Risks to the outlook are tilted to the downside due to the continuing high uncertainties in the global energy market and concerns about dimming global growth. The continuing reliance on the O&G sector makes Brunei Darussalam vulnerable to shocks. Given the continuing challenges in rejuvenating offshore O&G fields and the compound effects of COVID-19 restrictions among other factors, an extended period of disruptions in upstream O&G production could weigh on growth. On the external front, concerns over weakening global demand in 2023 could be a drag on exports.

Sharply higher borrowing costs could exert downward pressure on corporate earnings at a time when external demand is moderating. Local businesses — particularly those still recovering from the pandemic, such as the tourism and transportation sectors — could come under pressure to service their debt obligations, or face difficulties in rolling over their debt.

Perennial risks, for example risks posed by climate change, could also undermine Brunei Darussalam’s macro-financial stability in the longer term. Extreme weather-related events not only result in significant losses to physical assets/infrastructure but could also strain public finances.

Policy recommendations

The strong O&G export receipts from high oil prices have helped to restore Brunei Darussalam’s fiscal position. Looking beyond the immediate gains, continuing efforts to further diversify revenue sources would be desirable to reduce the procyclicality of public finance. The authorities are also encouraged to press ahead with expenditure reforms to anchor medium-term fiscal sustainability.

The Brunei Darussalam Central Bank standing facility deposit and lending rates have increased since May 2022, mirroring the developments in Singapore. The existing administrative price controls should be maintained, which can help temper, but not offset, the upward pressure on inflation. In this regard, the Currency Interchangeability Arrangement with Singapore continues to be beneficial, given the openness of the Brunei economy and the need for a strong currency to contain imported inflation.

The increased volatility in global financial markets calls for close monitoring of risks associated with banks’ foreign lending activities, and placement of surplus funds abroad for investment. The authorities are encouraged to continue to strengthen their surveillance and risk management framework. The continued provision of credit to the micro, small and medium enterprises (MSMEs) remain important to foster private-sector growth and developments.

While the economic diversification progress is commendable, there is room to expedite the implementation of FDI projects in priority sectors, such as food, information and communication technology (ICT), and tourism. It is encouraging to note that various initiatives have been put in place to address other long-standing structural issues, including those in the labor market. Policy support should also continue to focus on increasing the private sector’s role in the economy, notably through the development of MSMEs alongside the expansion of their global market access. The authorities are also encouraged to be proactive in tackling climate change issues, supported by appropriate budget allocation.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. AMRO also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.