Outlook for 2011-12

Brunei will remain an autocratic state in 2011-12, with power concentrated in the hands of the sultan, Hassanal Bolkiah Mu'izzaddin. The token meetings of the largely appointed Legislative Council for a few days each year will continue, but the sultan is unlikely to fulfil his pledges to allow limited democratisation. The ageing of Brunei's oil- and gasfields mean that economic expansion will remain weak in 2011-12, but unimpressive headline growth figures will mean little, as high oil prices will keep the sultanate flush with cash and able to support the shift of the economy towards the non-energy sector.

The political scene

There have been no notable developments in Bruneian politics. The political scene is dominated by speeches by the monarch, and on the occasion of the country's 27th National Day he delivered an unremarkable annual speech. In Brunei's international politics, the country remains active in peacekeeping missions in the Philippines and Lebanon, leveraging its image as a stable and moderate Muslim country.

Economic policy

The Monetary Authority of Brunei Darussalam was inaugurated on January 1st 2011. Among other responsibilities, the new body will be in charge of monetary policy, although the pegged exchange rate, whereby the Bruneian dollar is pegged to the Singaporean dollar, gives Brunei little leeway for action on monetary policy. The government denied that the new body was being set up in advance of moves to scrap the pegged exchange rate. Possibly a more visible function of the new authority will be to regulate the banking sector, in line with international attempts to improve financial regulation.

The domestic economy

Brunei has not published any GDP data for 2010, but the economy is likely to have staged a modest rebound, following a contraction of 1.8% in 2009. Higher energy prices in 2010 relative to 2009 will have improved the budget and trade surpluses. A natural gas contract with a Japanese power company is coming up for renewal soon, amid signs that increases in supply elsewhere will weaken Brunei's hand in the negotiations. Brunei has appointed a representative company in Australasia to promote tourism.

Foreign trade and payments

Trade data releases were not forthcoming in the fourth quarter of 2010, but there is little likelihood of a change in Brunei's foreign trade pattern. Its exports consist largely of oil and gas, under long-term contracts with Japan and South Korea, and the country is reliant for imports on the South-east Asia region.

Land area

5,765 sq km

Population

406,200 (2009 government estimate)

Main towns

Bandar Seri Begawan (capital; population 27,285, 2001 census)

Climate

Tropical

Weather in Bandar Seri Begawan (altitude 300 metres)

Hottest month, August, 24-33°C (average daily minimum and maximum); coldest month, January, 24-30°C; driest months, February and August, 100 mm average rainfall; wettest months, January and November, 3,000 mm average rainfall

Languages

Malay; Chinese and English are also used

Measures

The metric system. Local measures include:

1 pikul = 25 gantang = 100 katis = 60.48 kg

1 koyan = 40 pikul = 2.419 tonnes

Currency

Brunei dollar or Brunei ringgit (Br$); Br$1 = 100 sen (cents). The currency is interchangeable with the Singapore dollar. Average exchange rate in 2010: Br$1.36:US$1

Fiscal year

April-March

Time

8 hours ahead of GMT

Public holidays

January 1st (New Year's Day); February 3rd (Chinese New Year); February 15th (Prophet Mohammed's birthday); February 23rd (National Day); May 31st (Royal Brunei Armed Forces Day); June 29th (Israk Mikraj, Ascension of the Prophet); July 16th (sultan's birthday); August 1st (beginning of Ramadan); August 17th (Anniversary of the Revelation of the Quran); August 30th (Hari Raya Aidil Fitri, end of Ramadan); November 7th (Hari Raya Aidil Adha, Feast of the Sacrifice); November 28th (Islamic New Year); December 26th (Christmas holiday). Islamic holidays are based on lunar sightings

Official name

Negara Brunei Darussalam

Form of state

Sultanate

The executive

The sultan is advised on policy matters by four councils: the Religious Council, the Privy Council, the Council of Succession and the Council of Cabinet Ministers

Head of state

HM Sultan Hassanal Bolkiah Mu'izzaddin

National legislature

The appointed legislature, suspended since 1984, was briefly reconvened in 2004. A new legislature with five indirectly elected members, the Legislative Council (Legco), was convened in 2005 and has met periodically since. Plans have been announced to introduce a legislature of 45 members, 15 of whom would be elected by popular vote, but no timetable for an election has been announced

Legal system

Courts of first instance exist on a local and religious basis; appeals go to the Religious Council in religious cases, and to the High Court and thence to the Court of Appeal in other cases. All major judicial posts are filled by the sultan's appointees

National elections

The last election was held in 1962; no date has yet been set for an election to a partly democratic Legco

National government

The sultan, close family members and his appointees control all organs of state power, including the Council of Cabinet Ministers, under the state of emergency that has been in force since 1962

Main political organisations

There is currently only one legal political party, the Parti Pembangunan (PP, National Development Party), which was legalised in 2005. The other two parties, the Parti Kesedaran Rakyat (PAKAR, People's Awareness Party) and the Parti Perpaduan Kebangsaan Brunei (PPKB, Brunei National Solidarity Party), were deregistered by the government in 2007-08. Brunei's political parties are only intermittently active. Promotion of the national ideology of Melayu Islam Beraja (Malay Islamic Monarchy) has intensified since 1990

Sultan, prime minister, minister of finance & defence: Sultan Hassanal Bolkiah Mu'izzaddin

Senior minister, heir to the throne, head of monetary authority: Crown Prince Billah Bolkiah

Key ministers

Attorney-general: Hayati Mohd Salleh

Communications: Abdullah Bakar

Culture, youth & sports: Hazair Abdullah

Development: Suyoi Osman

Education: Abu Bakar Apong

Energy: Mohammad Yasmin Umar

Finance (second minister): Abdul Rahman Ibrahim

Foreign affairs & trade: Prince Mohamed Bolkiah

Foreign affairs & trade (second minister): Lim Jock Seng

Health: Adanan Mohd Yusof

Home affairs: Badaruddin Othman

Industry & primary resources: Yahya Bakar

Religious affairs: Mohamed Abd Rahman

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Brunei is likely to remain an autocratic state in the forecast period. The sultan, Hassanal Bolkiah Mu'izzaddin, remains at the centre of government, and he has given no indication that he will honour his past pledge to introduce partial democratisation soon. The political scene therefore appears completely static. The sultan has sent signals of a political liberalisation of sorts, by appointing an ethnic-Chinese minister in 2005 and selecting a female minister in May 2010, but these kinds of apparent liberalisation still skirt around the central issue of democratisation. The sultan is able to signal a move away from an ethnic-Malay, religiously conservative polity in these ways, but these signals are tokenistic in the absence of popular participation in government. Interestingly, a cabinet reorganisation in early 2010 institutionalised regular five-yearly reshuffles, as originally announced in 2005, but it did not involve the deletion of the names of the sultan, his son or his brother from the cabinet list. The sultan is his own prime minister, defence minister and finance minister, and other portfolios are held by members of the royal family. The five-yearly reshuffle process itself underlines the political time-warp in Brunei, as most other countries keep their senior government positions under regular review.

There is therefore little reason to expect meaningful political reform in 2011-12. The political scene, such as it is, will consist of royal visits to hospitals and other public places, peppered with worthy-sounding but essentially meaningless speeches. Long-standing promises to introduce a partial democratisation of the Legislative Council (Legco) have apparently been put on the back burner. Legco, which is mainly appointed, with a few indirectly elected members, will continue to meet for only a few days each year.

In the long term democratisation may be contemplated, as Brunei's oil and gas wealth will not last forever and the ruling family needs to prepare for a time when the state cannot continue to provide the current panoply of benefits that it makes available to the population without levying income tax. At the moment, all Bruneians benefit from the country's oil wealth, albeit not equally. Oil and gas revenue funds public-sector jobs, education and healthcare, and the energy sector is the ultimate source of the ruling family's wealth.

Although the sultanate is politically stable, this stability may be more fragile than it seems, as it is built on oil wealth that will not last. Consequently, the government has a couple of decades in which to attempt to build a larger private sector to protect the country's prosperity when hydrocarbon reserves are exhausted. Despite the stagnant state of politics in the sultanate, there are a number of wild cards that could affect political life. Brunei is a conservative Muslim country, but still needs to guard against extremism, given that Islam in nearby Indonesia has seen the development of a radical and even terrorist fringe in the past decade. Unemployment is low in Brunei, but as public-sector largesse is reduced issues such as migration into the territory from neighbouring countries could become more politically charged.

A Legco election was held in 1962, and was won with a landslide by the Parti Rakyat Brunei (PRB, Brunei People's Party). When the PRB was prevented from forming a government, it staged an armed rebellion, which was suppressed by Gurkha units of the British army. A state of emergency was subsequently declared. Following the annulment of the results of Brunei's first election in 1962, no legislature has since been elected. (A handful of members of the largely appointed Legco are elected indirectly through the village councils.) No meaningful elections are expected in the forecast period, and the Economist Intelligence Unit expects the sultan to continue to monopolise political power.

Despite Brunei's small size, it is able to play a role in the Association of South-East Asian Nations (ASEAN), and also maintains strong contacts with other countries, especially Muslim ones. In 2010 Brunei and Malaysia finally concluded an agreement, which had been in the offing for some time, whereby previously disputed maritime areas were acknowledged as Bruneian, and the two countries reached a production-sharing agreement for oil output from these areas. Brunei has yet to reach an agreement with China on territorial claims in the South China Sea, but the two sides seem to be open to joint exploitation of the area. International relations within the region focus on the expansion of trade and investment links, and disputes tend to be glossed over. Brunei is continuing to play a peacekeeping role in the Philippines and Lebanon.

Brunei runs large trade and budget surpluses, thanks to strong revenue from the energy sector. It also has huge overseas assets, as much of its oil wealth is channelled into investments abroad. What will be crucial to the country's prospects is diversification away from the energy industry and into non-energy sectors as its oil reserves are gradually depleted. The government has the financial resources to attract investment, but progress in developing the non-energy economy has been slow. The most obvious example of this is a methanol plant based in the Sungai Liang Industrial Park, which took six years to progress from inception to completion. The small size of the domestic market dissuades many investors from setting up operations in the sultanate, despite the investment incentives that the government is able to offer. A number of projects are in hand to boost production in the agricultural and agri-processing sectors.

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Brunei's policy decision to slow the depletion of its remaining energy reserves means that the energy sector will not be a major source of economic growth in 2011-12. Some new gasfields will be brought into operation, but this not likely to happen until after 2012. The latest data show a contraction of 1.8% in GDP in 2009. This is likely to have been followed by a modest rebound in 2010. The non-energy sector will continue to make a positive contribution to GDP growth, which is expected to strengthen gradually to 1.4% in 2011, from an estimated 1% in 2010, assuming that there is no renewed dip in the performance of the global economy.

The likely return of the Bruneian economy to growth reflects a number of factors. Sustained higher oil prices may encourage the sultanate to produce more oil. A methanol plant has been completed, and began to produce and export methanol at the end of May 2010. Building work is continuing on the Pulau Muara Besar port (the first phase of which will be completed by end-2012), and construction of a power-transmission line from Malaysia to Brunei (again due for completion by end-2012) will also underpin economic activity. However, the pace of GDP growth, which is expected to average around 1.3% a year in 2011-12, will lag behind that of other countries in the region.

In the energy sector, it is highly likely that new oil reserves will be discovered in 2011-12. The forecast period will see exploration work in two offshore zones, following a recent maritime-border agreement with Malaysia. Although Brunei does not wish to see its hydrocarbon reserves depleted too rapidly, the agreement specifies co-operation in production for a 40-year period. Oil discovered in the zones would be likely to be brought into production in 2016 or 2017 (well after the end of our forecast period).

Construction work at the Pulau Muara Besar port will also serve to underpin GDP growth in the next few years. The port faces competition from transshipment hubs such as the Port of Singapore and Malaysia's Port Klang. However, the government is committed to the project, believing that the port will increase trade flows. Other sectors of interest to the government are information technology (IT), Islamic banking and renewable energy. Food processing, especially in the halal (Islamic dietary) sector, may create jobs, and the government is hoping for more visitor arrivals, but it is questionable how far tourism in a conservative Islamic country can take off. Brunei's population is very small, and there are only a few thousand unemployed people. Consequently, only one or two large investments in these sectors would do much to improve employment prospects. Larger investments may be needed to fill the gap left by the retreat of the fossil-fuel energy sector over the next few decades, and the government's plans to privatise some public services may result in job losses. However, the government is likely to proceed gradually with this agenda, allowing a slow shift of focus away from the energy sector to non-energy activities.

Theoretically, Brunei is subject to imported inflationary pressures, not least because it depends on imports for a large proportion of its food needs. However, in practice the sultanate has managed to keep inflation low. This is partly because of the success of the currency peg, which links monetary policy to the well-managed Singaporean economy, but is also because Brunei has the wherewithal to subsidise a range of prices, limiting the impact of import prices on domestic inflation. Consumer price inflation is thus forecast to remain within the range of 1-2% a year in 2011-12.

The Brunei dollar is fixed to the Singapore dollar at parity. In general, the currency peg has served Brunei well, linking its economy to the well-managed economy of Singapore and preventing a surge in the value of the Brunei dollar as a consequence of large current-account surpluses. The government has indicated that no change to the currency peg is planned. The Brunei dollar averaged Br$1.36:US$1 in 2010, and is expected to firm to Br$1.32:US$1 in 2011 and Br$1.30:US$1 in 2012.

Brunei will continue to record large surpluses on its current account. Boosted by higher oil and gas prices in 2010, the surplus is estimated to have risen in 2010, from US$4bn in 2009. Global oil and gas prices are expected to remain relatively high in 2011-12, and this is likely to swell the surplus further. Brunei's current-account surplus will remain equivalent to 40-50% of GDP during the forecast period. Exports of crude oil and liquefied natural gas (LNG) will continue to account for the lion's share of total exports, while the country will remain dependent on a range of consumer and capital-goods imports to meet domestic needs.

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There have been no significant developments in Bruneian politics in the past quarter. The sultan, Hassanal Bolkiah, used the 27th anniversary of Brunei's independence in late February to deliver his National Day speech. He spoke of the importance of not wasting government subsidies in public services, highlighted the importance of education in moving the economy away from reliance on oil and gas, and underlined the importance of maintaining political stability in order to attract foreign investment.

Although the sultan's comments expressed worthy aims, he once again failed to give any details on the partial democratisation of the country that he has promised in the past. There has been no notable activity by the one remaining legal political party, Parti Pembangunan (National Development Party). The sole notable political event in the yearly calendar is the annual meeting of the largely appointed Legislative Council, which meets each March to hear a number of presentations on the government's budget and other affairs.

Despite Brunei's small size, it has the potential to play an important symbolic role on the international stage as a moderate and stable Islamic country, and it is active in peacekeeping in a number of countries with Muslim populations, including the Philippines. Brunei has 15 soldiers on peacekeeping duties in Mindanao, a Muslim region of the Philippines. The Royal Brunei Armed Forces comprise 5,700 personnel, of whom 3,900 serve in the army. In January Brunei increased the size of its contingent in Lebanon to 20, under the aegis of the UN Interim Force in Lebanon. The small force will be under Malaysian command. Brunei has been active in Lebanon since 2008.

Against a background of global concern regarding financial regulation, the Monetary Authority of Brunei Darussalam (AMBD) was set up on January 1st, amid expectations it would play a vital role in protecting Bruneian consumers from fraudulent financial products and mis-selling of investments. Financial regulation was previously handled by the government's Financial Institutions Division, a department of the Ministry of Finance, but the inauguration of the AMBD, which is responsible for both monetary policy and banking sector regulation, should lead to better policy co-ordination in the future. Management of the national currency, the Brunei dollar, also comes under the AMBD's remit.

The Ministry of Finance denied rumours that the creation of the AMBD would lead to a breaking of the peg of the Bruneian dollar to the Singaporean dollar. One implication of the peg is that Brunei has little scope to pursue monetary policy independently, but the link to the Singapore dollar is seen as having been a boon to the Bruneian economy since its introduction in 1967, not least in warding off "Dutch disease", whereby resource-rich economies grapple with overly strong currencies.

Figures compiled by Brunei Tourism, the government agency charged with attracting visitors to the country, show that 24,000 visitors arrived from Australia and New Zealand in 2010. Brunei Tourism is seeking a 20% increase this year, aided by the establishment of direct flights to Melbourne, Australia, from March, operated by the national carrier, Royal Brunei Airlines. In February Brunei also appointed the Australian Walshe Group, a specialist in the niche area of representative offices in the tourism sector, to function as a representative office in the region, charged with marketing Brunei as a tourist destination. Walshe already operates Royal Brunei Airline's representative office in New Zealand.

The conservative Islamic sultanate has some drawbacks in terms of tourism, particularly the prohibition on the sale of alcohol (although non-Muslims are permitted to drink alcohol in private). But the government has said that ecotourism and golfing holidays are themes that can be emphasised in its Australasian campaign. Walshe is to take a group of travel agents and reporters to Brunei to highlight the country's tourism potential.

Brunei Tourism is also considering setting up a representative office in China to encourage visitor arrivals from that country, following the re-establishment of Royal Brunei Airlines' flight route to Shanghai. Brunei receives 22,000 visitors from China and Hong Kong each year, as well as 2,000 from Taiwan.

The bulk of Brunei's energy exports are committed under long-term supply arrangements with Japan. However, a key natural-gas supply contract with Tokyo Electric Power that has been in place since 1973 is due to expire in March 2013, and the parties are hoping to negotiate a new contract in the near future. The Japanese company imports 4m tonnes of liquefied natural gas (LNG) a year from Brunei, but has indicated that its consumption of LNG is likely to fall in the years ahead.

As far as LNG is concerned, Brunei's room for manoeuvre in negotiations is limited by new supply expected from Australia and Papua New Guinea, and other Japanese importers, including Tokyo Gas and Osaka Gas, have begun to press for better deals in the future. Given global concern over energy supplies, Brunei is likely to continue to earn large sums by supplying oil and gas over the next 20 years, but may find itself exploring a wider range of export destinations for the fuel.

Brunei's published statistics cover external trade up to 2009. Data are therefore not available for 2010, but there is little likelihood that there will have been a change in the general pattern of Brunei's external trade-namely, the fact that exports consist almost entirely of oil and gas and are largely bound for Japan and South Korea under existing supply contracts, while the sultanate is dependent on imports for a large range of goods, including foodstuffs, cars and other manufactured goods that are sourced mainly from the South-east Asia region. The country's large surplus on goods trade is likely to persist for many years to come.

Brunei recorded a trade surplus of Br$6.9bn (US$4.6bn) in 2009, as the country's external trade remained underpinned by the oil and gas industry. However, this outturn was far below the Br$11.3bn surplus that had been recorded in the previous year, partly reflecting the fall in global prices for oil and gas in 2009. Government statistics show that Brunei's imports fell by just 4.3% in value in 2009, whereas exports were down by 30.2%. The value of crude oil exports fell by 37.4% in 2009, to Br$5bn, and exports of LNG were down by 24.3%, to Br$5.1bn. Brunei's garment exports-the only significant category of exports in 2009 outside the energy sector-plummeted by 53%, to Br$57m (US$39m).

Official Chinese figures show that total trade between Brunei and China reached US$1bn in 2010, an increase of 143% year on year. Brunei runs a large surplus on trade with China, with exports of hydrocarbons the main driving force behind rising trade. It is likely that China will play a larger role in Brunei's energy exports in the future. Nevertheless, trade with China will continue to be dwarfed by the more important trade with Japan and South Korea.