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Last Updated: Jun 25th, 2007 - 17:07:26 |
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Brunei's key strategy now is to build foreign reserves and invest them around the world to help provide for future generations. |
To those unfamiliar with the Southeast Asian region, Brunei might as well have been an obscure spot on the world atlas had it not been for the country's large oil and gas reserves. Yet for others, Borneo is simply shrouded in mysticism and mystery - typical of anything that is associated with that part of the world known as the Borneo island.
But history has many interesting stories to tell about Brunei: It was so powerful from the 14th through the 16th century that at one point, its territory covered Sarawak, Sabah and the southern Philippines.
Brunei later entered a period of decline due to internal feuds over royal succession which coincided with the rise of European colonial powers in the region. Brunei eventually lost much of its territory to the White Rajahs of Sarawak - the first being English voyager James Brooke. Brunei remained a British protectorate from 1888 to 1984.
Despite all the upheavals over centuries, absolute monarchy survived in Brunei, making it one of the most politically stable countries in Asia save for an armed uprising attempt- thwarted with British assistance, in the 1960s.
Blessing becomes curse
In the following decades, this centralised political system, coupled with a small population of some 374,000 and huge oil revenues, enabled the government in Brunei to provide all medical services and to subsidise everything from food to housing.
At US$23,000, Brunei’s gross domestic product (GDP) per capita is far above that of most other Third World countries (Malaysia’s GDP per capita is about US$12,100 and Thailand’s is US$8,300, according to CIA World Factbook’s estimate). Additionally, Brunei is notable in Asia for not levying any income tax on its population.
But what worked for Brunei in the past may have become a curse. Because oil and natural account for almost exports - accounting for half of Brunei’s gross domestic product and almost 90% of government revenue - the economy now faces the danger of having all the eggs in one basket. Currently the third-largest oil producer in Southeast Asia, Brunei pumps about 203,000 barrels a day. It is also the fourth-largest producer of liquefied natural gas in the world.
The risk seems acute when one considers the fact that Brunei’s proven oil and gas reserves could run dry as early as 2015 if it cannot find significant new reserves through deep-sea exploration. Fluctuating oil prices also create uncertainty and instability in Brunei’s economy.
Another impetus for Brunei to widen its economic base came in the form of the 1997 Asian financial crisis, when Amedeo Development Corporation, Brunei’s largest construction firm which previously helped fuel the economy through various large-scale projects, collapsed. Consequently, Brunei slipped into a mild recession.
Herein lies the dilemma for Brunei’s government. Sultan Hassanal Bolkiah and his Cabinet recognise the need to diversify Brunei’s economy, but they are also worried an increased integration with the world economy may undermine internal social cohesion which Brunei has long enjoyed.
Economic diversification
Such considerations have prompted Brunei’s government to carefully chart its economic diversification. To play a more prominent role in the world economy, Brunei chaired the 2000 Asia-Pacific Economic Cooperation (APEC) forum.
Brunei’s key strategy now is to build foreign reserves and invest them around the world to help provide for future generations. This has been done with limited success and great caution.
Domestically, Brunei has tried to encourage entrepreneurship and to make the workforce seek alternatives to employment by the public sector. Unemployment is rising and many school-leavers are unable to get jobs. This, the government wants to achieve by nurturing new downstream businesses that leverage on Brunei’s oil and gas industry as well as strengthening the existing non-energy industries.
This is why the national airline, Royal Brunei, has outlined ambitious plans to make Brunei an international travel hub between Europe and major Asian destinations.
Another closely watched development is the possibility of Alcoa setting up an aluminium smelting plant in the major industrial site of Sungai Liang. Based in the US, Alcoa is the world’s leading aluminium producer with over US$20 billion in revenue per annum.
Overall, Brunei’s economic diversification has been slow to gain traction. Observers argue that the country’s small private sector needs more opportunities to spread its wings, and say the government’s overreaching role is stifling entrepreneurship.
A plan to privatise the state telecommunications firm was dropped after workers reportedly objected to losing their government employment rights.Another obstacle for private companies in Brunei is human resources. Many find it hard to recruit and retain local workers, who currently still prefer secure government jobs with generous benefits.
Limited market for Halal food exports
To ensure the supply of fresh halal beef, Brunei’s government in 1987 acquired Scott Creek/Willeroo Station that owns some 6,000 square kilometres of cattle farm in Northern Territory, Australia.
Some 33,000 cattle are reared in the farm and then imported live for slaughter in Brunei, in order to ensure Islamic religious requirements are observed. Brunei also assists local stock farmers with calves, machinery, feed, seedling, fertilisers and veterinary care.
Export opportunities to Brunei are thus extremely limited in view of the overwhelming government support given to local farmers as well as the strict regulations, the Agriculture and Agri-Food Canada concluded in its study published in 2001.
Islamic banking
The one area that Brunei does have much potential in is offshore financial services. As a late entrant into the sector, Brunei nonetheless introduced much legislative and regulatory reform over the past four years to position itself as a viable tax-free jurisdiction for international banks and financial institutions.
It’s a strategy that’s beginning to pay off. Brunei has attracted, among others, HSBC, Royal Bank of Canada and Hong Kong’s Sun Hung Kai International Bank, to provide offshore services there. One market segment Brunei is keen to develop is banking products for the fast-growing international Islamic financial sector.
Brunei’s conservative Muslim traditions - Islam is the official religion of Brunei and the Sultan is the head of religion - give the Brunei International Financial Centre (BIFC), a government agency tasked with developing the country’s financial sector, an advantage and incentive to approach banks in the Middle East that want to shift and diversify their operations.
Until now, that’s an opportunity that remains largely uncaptured. Moving forward, BIFC officials see a huge demand for Brunei’s Islamic banking given that an estimated 30% of bank deposits in the country are already in Islamic instruments that are compliant with Shariah principles.
As recent as June this year, Brunei announced the setting up of a new government board to regulate Islamic banking and financial businesses. Dubbed the Shariah Financial Supervisory Board, the council counts senior Finance Ministry officials, a Shariah High Court judge, a top Muslim cleric and legal specialists among its board members.
“A modest version of Singapore with a dash of Bahrain,” said Robert Miller, BIFC head of supervision, when describing what Brunei aspires to be in the world of global banking. That is, by far, the clearest indication of how Brunei has come to acknowledge its good old, carefree days of living on petrodollars are over.
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