Today The Brunei Times published an article highlighting a report by the WTO Trade Policy body (hat tip to The Brunei Times for bringing this report to our attention). In The Brunei Times report, Izam Said Ya'akub highlighted key points in the report: that Brunei is still too heavily dependent on the oil and gas industry as observed from its share of the country's GDP, and despite Brunei's continuous effort and rhetoric to diversify from oil and gas, Brunei's non oil and gas sector seems to have shrunk instead, from 3% of GDP in 2002 to only 1% at the end of the policy review. Suffice to say, Mr. Red and Mr. White decided to trudge through the internet to find this report, and within a few minutes, managed to find the report that The Brunei Times was dissecting - see here - (on a side note, Mr. Black will be joining our team soon, but he's caught up with work at the moment).
The report itself is over 100 pages, and it took us a while to digest the material. Certainly the The Brunei Times article has summarised key important points in the WTO report, but there were alot more details in there that, as we mentioned, newspapers either cannot or would not be able to cover. We're here to provide that information.
The report itself is over 100 pages, and it took us a while to digest the material. Certainly the The Brunei Times article has summarised key important points in the WTO report, but there were alot more details in there that, as we mentioned, newspapers either cannot or would not be able to cover. We're here to provide that information.
What's Inside the WTO Policy Review?
WTO's assessment and review of Brunei Darussalam, which it calls 'a prosperous, relatively open economy still overly dependent on oil and gas', was conducted within the backdrop of our country's 8th National Development, and while Brunei has achieved some success in some sectors (more later), overall achievement as highlighted by The Brunei Times, has not been very encouraging. Bruneians as a whole has enjoyed the windfall from historically high oil prices, and that benefit has translated to a healthy increase in our per capita GDP (we cannot tell if the graph included in www.bt.com.bn has data reflecting this as the table provided is too small, and we didn't have time to find a hard copy of the paper - edited: note: figure shown below from brudirect.com). From 2002 to 2006, Bruneians have enjoyed an almost 100% increase in our per capita GDP (in US$), from B$30,398.0 (US$16,976.5) in 2002 to B$47,964.0 (US$30,185.4) in 2006. The figures are presented below in chart and table below:
Brunei' s GDP per capita is almost on par with Singapore's and in fact we have enjoyed faster growth rates each year than Singapore in the period 2002-2006 (Singapore recorded an average growth rate of 6.88% per year, while Brunei enjoyed almost double the growth rate, calculated at 12.12%). Data for Singapore is shown below (Singapore provides their data online and can be accessed through here, something the Bruneian e-government initiative that we mentioned in our earlier post should take note).Singapore GDP per capita 2002-2006
However, in interpreting and comparing our GDP per capita to Singapore's, we must not forget that Singapore has no natural resource and all of its GDP per capita increases over the last 40 years since its independence on the 9th August 1965 has been driven by human resource and their capacity to successfully build one of the cleanest, most transparent and efficient economies. While 94% of Brunei's total revenue comes from oil and gas, vulnerable to oil and gas fluctuations, as the WTO has observed, Singapore's revenue comes from a diversified pool of sectors such as banking and finance, services, tourism, manufacturing, etc, reducing their risks to external shocks.Share of Main Sectors in GDP for Brunei
Oil and Gas: Brunei Yakin?
The importance of the oil and gas sector's contribution to Brunei's economy during the 2002-2006 period simply cannot be emphasised enough. The WTO report stated that Brunei:
'continues to owe its economic prosperity overwhelmingly to its abundant petroleum and natural gas resources, whose share of current GDP grew from 53% in 2002 to 69% in 2006' (emphasis added).
Oil and gas export's share of total exports from 86% to 96%. The report also highlights that:
'Petroleum ... continues to be the main source of revenue for the Government. Corporate taxes and royalties paid by oil and natural gas companies now account for some 94% of all government revenue, up from 86% at the start of the review period in 2002. By contrast, Brunei levies virtually no tax on personal incomes or on goods and services. Tax revenue therefore fluctuates with oil and gas production, changing petroleum prices, and the profitability of the oil and gas industry. For most of the period under review, the saving of windfall revenues associated with high energy prices has placed the Government in a strong fiscal position and thus helped stabilize the economic cycle'.
As such, only 6% of what we earn as a country comes from sources other than oil and gas, which as the WTO highlighted, puts Brunei in a position where it can suffer great external shock, at the mercy of international market forces dictating oil and gas prices.
'continues to owe its economic prosperity overwhelmingly to its abundant petroleum and natural gas resources, whose share of current GDP grew from 53% in 2002 to 69% in 2006' (emphasis added).
Oil and gas export's share of total exports from 86% to 96%. The report also highlights that:
'Petroleum ... continues to be the main source of revenue for the Government. Corporate taxes and royalties paid by oil and natural gas companies now account for some 94% of all government revenue, up from 86% at the start of the review period in 2002. By contrast, Brunei levies virtually no tax on personal incomes or on goods and services. Tax revenue therefore fluctuates with oil and gas production, changing petroleum prices, and the profitability of the oil and gas industry. For most of the period under review, the saving of windfall revenues associated with high energy prices has placed the Government in a strong fiscal position and thus helped stabilize the economic cycle'.
As such, only 6% of what we earn as a country comes from sources other than oil and gas, which as the WTO highlighted, puts Brunei in a position where it can suffer great external shock, at the mercy of international market forces dictating oil and gas prices.
Another worrying issue is also that while oil and gas continues to propel Brunei's economy forward, the same period 2002-2006 saw the non oil and gas sector shrink, despite our government's effort to diversify our economy. Brunei's economy therefore, as a matter of fact, is in such a precarious position that no one in Brunei or anyone in the world for that matter, can predictably control if we continue to expose ourselves to the risk of being totally dependent on one source of revenue. We are TRULY at the mercy of global political and economic forces, and with a large proportion of our population that we argue are still wet behind the ears when it comes to our country's (and to a large extent, their personal) economic and financial situation, it is a worrying situation.
How much more do we have?
One of THE most important question for Brunei apart from 'when can we truly successfully diversify from oil and gas' is 'how much more of that black gold and gas do we still have?'. In our earlier posting, we suggested that Brunei's economic diversification policy started in the 1970s, but further research has revealed that Brunei was well aware of the need to diversify by the mid 1950s - almost 60 years ago. In a report by E.R. Bevington titled ' A Report on the Economic Development of the State of Brunei, published 30 June 1955, Bevington writes:
'The dependence of the State on oil this becomes apparent. And oil is a wasting asset. So long there is only one known reservoir (Seria) oil revenues will progressively decrease to a point where the oil field is eventually closed down.
Contrarily annual expenditure is increasing rapidly, and with the fulfilment of the development programme a substantial additional burden of annually recurent expenditure will be imposed on the State of the fabric now being built is to be maintained as oil revenues decrease...
In short then, the problem is to save sufficient against the years to come when oil diminishes, while at the same time making a second string to the State's bow in the form of genuine economic development. Expenditure should be governed by these two overriding considerations'.
Contrarily annual expenditure is increasing rapidly, and with the fulfilment of the development programme a substantial additional burden of annually recurent expenditure will be imposed on the State of the fabric now being built is to be maintained as oil revenues decrease...
In short then, the problem is to save sufficient against the years to come when oil diminishes, while at the same time making a second string to the State's bow in the form of genuine economic development. Expenditure should be governed by these two overriding considerations'.
So as far back as the 1950s, we were already aware that oil and gas is, as Bevington calls it a 'wasting asset', and according to the WTO, based on current extraction rates, Brunei have around 10-25 years of oil left with upwards of 40 years for natural gas, all these figures are widely quoted from various sources reporting on the economy of Brunei.
Our own team here at DebatingBrunei also did a modest calculation based on figures that we can find, and have come up with almost similar figures: based on CIA Factbook's figures for Brunei's proven reserves at 1.35 billion barrels (as at 2006) and the estimated extraction rate of oil at 200,000 barrels per day (although sources from insiders suggest that BSP will drop their extraction targets for the next 5 years to approximately 190,000 barrels per day due to their emphasis on contract fulfillment for their natural gas operations), not withstanding that Brunei manage to find new oilfields, oil will run out around 18 years. Natural gas proven reserves are at an estimated 374.8 billion cu m (2006) with production of 11.03 cu m (we assume per year as it isn't stated) then we have approximately 30 years of natural gas left. However insiders in the oil and gas industry suggest there are still oil and gas reservoirs to be found, but they are located in deep sea and the cost of extraction and deep sea exploration may be prohibitively expensive. So basically, barring that we find new oil and gas reserve, we have around 15-20 years to ensure that we, as a country can achieve what we have not been able to do for the past 50 years. A tall order, but one we think can succed if we as a country TRULY want to (perhaps only when we feel the pinch of a post oil and gas economy - a scenario which no Bruneian would want to see come true).
Why didn't we save enough as what Bevington suggested way back in 1955?
The fact of the matter is, we, as a country DID save sufficient and invested our sovereign wealth funds to ensure we have enough to generate income outside of oil and gas. According to a report by the Economic Intelligence Unit (as reported within the WTO report), Brunei had approximately US$80 billion worth of foreign assets in the early 1990s, which according to the WTO report:
"generated considerable investment income, which in many years seems to have exceeded the combined revenue from oil and gas'.
With income from our sovereign wealth fund investments higher than that generated by oil and gas, it would have meant Brunei would not have been exposed to 'oil and gas' shocks. Sadly, with all the fiasco of mid to late 90s, (see here and here), Brunei's wealth has dwindled to an estimated US$30 billion worth of foreign assets, which anyone with rudimentary mathematical abilities would be able to conclude that income generated from current foreign assets level is far from what Brunei was earning in the 90s. A very sad fact indeed.
On the plus side, the high oil prices over the past few years would have generated a huge surplus (although tempered by the devaluation of the US dollar), would help the country's effort to rebuild of our foreign assets and sovereign wealth funds. The biggest challenge however, according to the WTO report is our lack of transparency to these investments and the activities related to Brunei's sovereign funds, which as they suggested, is one of the bigger red marks on Brunei's Trade Policy Review 'report card'.
More to come.......
The WTO report is as meaty as you can get from an international report. With over 100 pages worth of data to sift through, the team will do its best to highlight other issues brought up by the WTO such as: a lack of transparency in government investment activities, disparity in public-private sector income which renders the private sector development agenda difficult, and the fact that Brunei's slow economic growth over the 2002-2006 period estimated at 2.5% cannot keep pace with Brunei's growing population (rate of 3%) , which means Brunei's unable to generate sufficient jobs for our labour market (hence our team suggests, will likely lead to a steady increase in unemployment if this trend continues).....
We'll get back to the report again soon.....
1 comment:
The need to diversify has been a topic for many years.
GDP-wise, Brunei is doing exceptionally well. Even if this is a 30 year view, it gives Brunei plenty of time to look into their options.
I assume that one of the roles of the BIA would be to diversify by investing elsewhere. It wasn't clear from the article if the investments so far is proving positive. In either case, it proves that the Government is trying to do something about it.
The Singapore model or even that of the Gulf States present some options. However, opening the country too much to foreign investors is also a risk. Brunei can learn from these models and apply the principles that suit them most, but should do so without losing too much to foreign control.
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