Brunei prepares for budget cuts
BANDAR SERI BEGAWAN
THE opening of the 12th Legislative Council (LegCo) – Brunei’s annual parliamentary session – looms large this Saturday, and the question on everyone’s mind is not whether government spending will be cut, but by how much.
Plummeting oil prices – falling from a peak of US$115 in June 2014 to US$33 in February 2016 – have severely hurt Brunei’s economy, slashing government revenue by 70 per cent over the past three years.
Gross domestic product (GDP) fell from $22.3 billion in 2013 to $21.6 billion in 2014, and although annual GDP statistics for 2015 have yet to be released by the Department of Economic Planning and Development, a year-on-year comparison of the third quarter (Q3) of 2015 shows a 17 per cent decrease in economic output compared to Q3 in 2014.
This means Brunei’s economy is set to contract for the third year in a row.
Cabinet ministers have already forewarned that government spending needs to be cut dramatically to ride out a time of weak global oil prices.
“The drastic drop in global oil and gas priced has severely affected the revenue of oil producing countries, resulting in them bearing huge financial deficit. This has also made some of these countries drastically cut their respective budget allocation,” Second Finance Minister YB Pehin Orang Kaya Laila Setia Dato Seri Setia Hj Abdul Rahman Hj Ibrahim said in January.
He added that Brunei may even surpass the projected government deficit of $2.28 billion for the 2015/16 financial year. The deficit is roughly equivalent to 10.5 per cent of the country’s GDP, a more than 10-fold increase from the $213 million deficit recorded in 2014/15.
That projection puts Brunei among the top 10 nations with the largest budget deficits in 2015, based on percentage of GDP.
With the Organization of the Petroleum Exporting Countries (OPEC) nations unable to agree to freeze output to counter the oil glut, the sultanate cannot count on a major recovery of oil prices any time soon but must prepare for a multi-year period of cheap oil.
Analysts eagerly await the announcement of the 2016/17 government budget, which is expected early next week, within the first few days of the Legislative Council session.
The need to curb spending has never been more urgent, so just how much will Brunei have to cut and where will those cuts occur?
With Brunei’s economy so dependent on energy exports, any fluctuation in the oil and gas industry will dramatically affect the local economy.
YB Pehin Dato Hj Abdul Rahman said some energy-exporting countries have had to take drastic action, such as cutting electricity and petroleum subsidies, and introducing goods and services tax.
Saudi Arabia, itself an oil-rich welfare state running a deficit equivalent 15 per cent of GDP, has been forced to make politically-sensitive economic reforms, announcing it will amend oil, water and electricity subsidies for its 30 million people, gradually re-pricing them over the next five years.
But why have oil prices fallen so dramatically and are they expected to go up any time soon?
Former CEO of Brunei National Energy Research Institute, Weerawat Chantanakome, said the US shale gas revolution meant a massive increase in supply, fueling the continually decreasing oil and gas prices.
“From 2010 to 2012, Brunei’s GDP growth was 2.6 per cent, beginning a downwards trajectory in the oil and gas industry that became clearer with the emergence of the shale oil and gas revolution and subsequent decline of global oil prices in 2013,” he told the industry publication, The Oil & Gas Year.
In the last year alone, oil prices have fallen by 45 per cent. A Reuters poll of 30 economists and energy analysts projected that oil prices will average just over $40 a barrel in 2016, a far cry from the June 2014 level of $115 a barrel.
Analysts are also sceptical that OPEC – which comprises 13 countries accounting for 40 per cent of global oil production – reducing its output will shore up prices, unless major energy exporters such as the United States and Russia – who are non-OPEC members – do not agree to freeze output as well.
In Brunei, oil and gas accounts for 60 per cent of GDP and more than 90 per cent of government revenue – the most oil-reliant economy in the world, according to the financial service Bloomberg.
Austerity measures – such as retrenchments and freezing new hires – have already been implemented in most of the sultanate’s oil and gas companies, and has caused consternation among the 26,000 industry workers, who represent 13 per cent of Brunei’s labour force.
Will expected government austerity measures have much further reach?
The Brunei Times