SINGAPORE, January 14, 2022 – Brunei Darussalam’s economy should recover moderately by 2.1 percent in 2021, after a slower but still positive growth in 2020 amid the global economic downturn due to the COVID-19 pandemic. Supported by higher oil earnings, the country’s re-tightening of containment measures and extension of support measures should help cushion the economic impact of the current wave of COVID-19 infections. The country also needs to accelerate economic diversification to strengthen its economic resilience. These conclusions were made in the 2020 Annual Consultation Report on Brunei Darussalam published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was produced based on AMRO’s Virtual Annual Consultation Visit to Brunei Darussalam, and data and information available up to September 10, 2021.
Recent developments and outlook
Brunei Darussalam’s economy grew at 1.1 percent in 2020, after expanding by 3.9 percent in 2019. The slowdown was due to the reduction in output of the oil and gas sector, which was offset somewhat by a surge in downstream manufacturing activities. The decline in the oil and gas sector in 2020 reflected the slump in global oil prices and demand, and turnaround activities in offshore installations for maintenance. In 2021, growth should recover moderately by 2.1 percent, reflecting the recovery in global oil prices and demand.
The overall balance of payments registered a deficit of 3.7 percent of GDP in 2020, largely attributed to capital outflows in the financial account and a narrower current account surplus, resulting in a decline in gross international reserves. The country’s fiscal deficit also widened sharply to 20.1 percent of GDP in 2020 from 5.6 percent in 2019, mainly because of the dramatic fall in oil and gas revenue. Looking ahead, Brunei Darussalam’s external position and fiscal balance should improve considerably, benefiting from rising global oil prices amid better global economic prospects. AMRO staff project a significant improvement in the current account balance and fiscal balance to 7.2 percent of GDP and -7.0 percent of GDP, respectively, in 2021.
Risks and vulnerabilities
Major downside risks facing the economy continue to revolve around the oil and gas sector. The country’s high dependence on the sector makes it highly susceptible to both domestic and external shocks in that sector. Domestic risks include disruptions in oil and gas production in mature fields, and the uncertain commercial viability of new field explorations in a low oil price environment. On the external factors, weaker prices and demand for oil globally will have negative implications on the economic outlook.
Despite progress in economic diversification, the economy remains dominated by the oil and gas industry. Continuing diversification into other sectors would help minimize economic risks and improve the resilience of the economy.
While vaccination is picking up pace, the number of local infections has continued to rise rapidly. The current wave of local infections, if prolonged, could have major economic fallout, especially through lockdowns, travel restrictions, and supply chain disruptions. In particular, containment measures will dampen domestic demand, raise the unemployment rate, and adversely affect micro, small and medium enterprises; factors that could lead to financial distress.
A faster and more effective vaccine rollout is highly recommended for achieving the government’s aim to fully inoculate at least 80 percent of the population by end-2021 to protect residents and mitigate the socio-economic impact of the current wave of infections.
The country’s fiscal deficit will likely narrow sharply in 2021 due to the recovery in oil and gas revenue on the back of a strong rebound in global oil prices. The recently extended fiscal measures until end-2021 are highly laudable, as they would help support households and businesses during the current lockdown. Further short-term fiscal support, if needed, should be flexible and targeted at households and businesses that are most affected by the pandemic, as well as enhancing public investments. In addition, efforts to reduce the high dependency on oil and gas revenues should be further strengthened, while enhancing spending efficiency.
Monetary conditions remain supportive of economic recovery amid low inflationary pressures. The government’s continued implementation of price administration measures has helped stabilize inflation, especially to cushion the impact of supply disruptions during the pandemic. However, in the longer term, the government should allow prices to be determined by markets to avoid distortions.
The government should maintain its accommodative macroprudential policies to ensure sufficient financial resources to support the recovery of private sector activity. The temporary regulatory relief measures—recently extended to end-2021—have allowed banks to support the private sector by deferring loan repayments, thereby averting a deterioration in asset quality. In the recovery period, the withdrawal of these measures should be gradual to avoid a cliff effect.
More efforts to accelerate economic diversification through various structural reforms are essential for the country to strengthen its resilience against shocks and sustain robust long-term growth.
The country should remain proactive in managing natural disaster risks by allocating the necessary budget to enhance climate change mitigation and adaptation measures under sustainable development policies.
The AMRO team would like to convey its gratitude to the Brunei Darussalam authorities and other participating institutions for their cooperation and candid exchange of views. AMRO wishes to express its appreciation for the authorities’ strong support and excellent arrangements, which have led to the successful completion of this virtual mission.
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 members.