Brunei Prepared To Weather Financial Storm

Brunei Prepared To Weather
Financial Storm

By Azaraimy HH

Bandar Seri
Begawan – While the low business set-up costs in Brunei are
pleasing, the number of ‘transactions’ required to set up a new
business remains a bureaucratic hitch, a situation which urgently
needs improvement for the sake of FDIs.

“First of all, it is my view as
someone who follows a number of countries in Asia that Brunei is
possibly one of the best prepared countries in the region to weather
the financial storm.

“That is primarily due to the
nature of the crisis. In contrast to many countries, Brunei does not
have significant external financing

needs and continues to enjoy a
healthy current account surplus. The financial crisis is hitting
hardest the countries that suffer from significant current account
deficits and have been caught up in a liquidity trap unable to
refinance their debts. Pakistan is the most acute example of that.”

In contrast, he said Brunei has
traditionally been a net exporter rather importer of financial
capital and has over the years built up a healthy cushion of
reserves which will stand it in good stead during these challenging
times.

Another advantage is that Brunei’s
currency remains stable with no risk of sudden financial outflows
that have been the cause of pain for many countries such as
Indonesia.

The Singapore dollar which Bruneian
dollar is pegged to has depreciated against other currencies, which
might actually help Brunei to improve its export competitiveness.
The risk of the Singaporean dollar going into free-fall is very low
given its government’s high reserves ? hence there is also little
currency risk

for Brunei.

But looking beyond resilience to
the ongoing financial crisis – which has yet to play itself out – we
have identified several key long term comparative advantages which
put Brunei in a good position to build on, he said.

He spelt out reasons why Brunei is
holding up well in the face of the financial crisis.

Like most surplus current account
countries, Brunei has plenty of room for fiscal expansion at home to
offset the weakening external demand conditions for its main oil and
gas export commodities.

Lower prices of oil on
international markets may well prove to be a blessing in disguise as
it will put more pressure on Brunei’s diversification efforts.
Oxford Business Group has long maintained that the share of oil and
gas in the country’s GDP needs to be reduced to unlock great
potential in services and non-oil and gas industries.

When the oil prices were very high,
the main issue was that the opportunity cost of using domestic oil
and gas to develop new downstream sectors was quite high. He said
that was the main sticking point in rolling out such high-profile
projects like the Brunei Methanol Company.

The correction in oil prices
therefore favours economic diversification ? something Brunei has
been pursuing for a number of years now.

“It is very fortuitous that Brunei
already has a well articulated government-backed development plan
which is rich in strategic content and looks beyond the cyclical
nature of financial crisis. In contrast to other nations in the
region, Brunei has gone much further in recognising the needs of
future generations.”

In contrast, most of the current
stimulus packages being launched in China, Europe and the US were
largely in response to the crisis and may well prove to be lacking
on strategic insight, he said.

Brunei’s Vision 2035, on the other
hand, has already been in the works for a number of years and has
been painstakingly developed to focus on realistic long term areas
of economic growth.

“We already have an advanced
economic agenda in new economy areas such as downstream oil and gas,
transport, halal food products, tourism and Islamic finance. The
most promising of these are Sungai Liang Industrial Park and Pulau
Muara Besar projects that create clusters of economic activity and
have significant spin-off potential as well strong backing from
local authorities.”

The main negative consequence of
the financial crisis on Brunei is that the crisis has really hit the
private sector, which now faces difficult access to financing from
banks. Although, this issue may be less acute in Brunei, the
government will need to step in to play the role of financial
intermediation, where banks are unable to do so. That is
particularly true in more risky projects that involve SMEs, services
and agriculture, he said.

One of the consequences of the
crisis is therefore the new challenge of reducing the size of the
government and encouraging the development of the private sector.

“On the other hand, as I think the
challenging external conditions provide sharp stimulus to increase
the pace of reforms in the public sector. We expect more pressure on
civil servants and various public sector agencies to cooperate
between themselves to facilitate and stimulate growth in the private
sector,” he said.

In his view, the Sultanate’s
political and financial stability

provides a safe haven for overseas
investors.

Another fall-out from the financial
crisis is a sharp fall in Foreign Direct Investment (FDI) activity.
Even formerly triple A-rated multinationals are now struggling to
raise capital in order to finance their overseas expansion. The
deleveraging process means some cannot afford to have emerging
market exposure.

However, Brunei is better
positioned than most countries to provide a safe haven for overseas
investors. Its main advantage is that it is perceived as politically
and financially stable, open for new business and strategically
located in the heart of Southeast Asia.

If Brunei continues to maintain
this image and reputation, he said, it could be in a sweet spot for
new mid-cap investment projects in the near future. Especially, if
it can improve its human capital base and press ahead with its
ambitious transport and infrastructure projects such as Sungai Liang
Industrial Park and Pulau Muara Besar ? the most likely home to new
international companies seeking a foothold in the region.

“Our view is that the seize-up in
FDI investments is a temporary phenomenon. In fact we believe the
process of outsourcing to Southeast Asia will be one of the engines
of economic recovery, which creates plenty of opportunities for
Bruneian companies to tap into the stream of new investment
projects. Yet at the same time, the competition for foreign
investment projects that create jobs and economic sustainability has
never been greater”.

To reach a critical mass and to
become a real regional investment hub will require persistence
dedication in creating strong FDI incentives, marketing Brunei
abroad and above all creating a transparent and business-friendly
working environment for foreign companies.

The latest Doing Business Report
from the World Bank shows that while Brunei does better than some of
its regional peers, it still has work to do if it wants to compete
with regional powerhouses such as Singapore, Hong Kong and Kuala
Lumpur.

Brunei scores high marks for labour
flexibility, light fiscal burden and exporting and importing goods.
However, it has plenty of catch-up to do in areas such as starting
up new businesses, enforcing contracts and transferring property.

The confusing issue for investors
is that the actual costs of transactions are qUite low and
corruption almost non-existent, but the number of transactions
required to set up business is very high.

Also, some legal items such as the
Land Act, for instance, need to be reviewed and updated to give
investors full confidence in their property rights.

It is reassuring that His Majesty’s
government is mindful of the need to improve these areas of business
environment and has been very proactive in fostering a new civil
culture that calls for more flexibility.

One of the key advantages that
Brunei has over its competitors in the region is that, despite a
fall in the oil price revenues, the government is well placed to go
into private-public-partnerships in order to overcome the shortage
of investment capital, especially in capital-intensive projects.

“The investment flow, we expect is
going to be most dynamic in downstream sectors that link Brunei’s
hydrocarbon resources to higher value added industries. The best
example of this is the Methanol Plant that we expect will be
completed by 2010,” he said.

Halal product development, too,
will continue to receive a lot of attention in Brunei.

“In conclusion, I would like to say
that the medium and long term priorities for Brunei should not be
influenced too much by the ongoing financial crisis. Brunei is well
insulated and prepared to deal with the worst financial effects of
the crisis.

“In fact we view the developments
in positive light as we expect that a correction in oil prices will
act as a strong stimulus and a major source of momentum for pressing
ahead with diversification projects, which remain the most important
strategic objective for Brunei,” he said.   —
Courtesy of Borneo Bulletin