Worldbox Business Intelligence Risk Rating – June 2024
BRUNEI
Summary
| Overall Risk Score 22 (Stable)
Political risk: Stable 8/10 Economic risk: Stable 7/10 Commercial risk: Stable 7/10 The risk assessment of a country is made up of 3 components, being Political, Economic and Commercial. Each component is scored out of 10 with 1 being the highest risk and 10 the lowest. |
ESG Risk: 8/10 (Stable)*
*Environmental, social and governance (ESG) issues are becoming increasingly important to companies, investors and consumers in Southeast Asia. That is why we are now preparing a separate ESG score and section with our quarterly country risk reports. We explain how each country rates, looking at the E, S and G individually, and outline recent developments. |
Political Risk – Stable at 8
Brunei is the smallest country in Southeast Asia with a population of 450,000. However, thanks to immense oil wealth, it is also one of the richest. Located on the island of Borneo and surrounded by Malaysia and the South China Sea, it is also politically stable. An Islamic sultanate, the Sultan of Brunei is both head of state and head of government and exercises absolute power over the country.
There are no elected representatives at the national level, while freedom of the press and assembly are significantly restricted. A legislative council with 36 appointed members is limited to a consultative role. Brunei operates two legal systems. A Common Law system has its origins in the English system and a Sharia Penal Code, running in parallel with the Common Law system. Around 80% of the population is Muslim. All senior judges are appointed by the sultan. However, according to Freedom House, the courts appear to act independently when handling civil matters.
There is little sign of dissent and the monarchy appears to enjoy popular support. The sultan has used the oil wealth to provide citizens with basic medical and dental services at no charge as well as free education and to invest heavily in developing infrastructure. There is no personal income tax. Citizens also enjoy heavy subsidies on fuel, electricity, water, rice, sugar and other staple foods.
Crown Prince Haji Al-Muhtadee Billah, 50, the eldest son of the Sultan of Brunei, is heir to the throne. Brunei maintains close ties with the USA, the UK, from which it gained independence in 1984, as well as Malaysia and Australia.
China is also increasingly influential. China has become Brunei’s largest trading partner, foreign investor and source of tourists. China is the biggest investor in Brunei’s port and petrochemical refinery, the country’s two major infrastructure initiatives. Brunei has become an enthusiastic supporter of China’s Belt and Road initiative.
Economic Risk – Stable at 7
Despite attempts at diversification, oil and gas remains the mainstay of Brunei’s economy. Oil and gas accounts for around 90% of Brunei’s total exports and just under two-thirds of the country’s GDP. Brunei has no sovereign debt, domestic or foreign. Brunei has the second highest GDP per capita in ASEAN, after Singapore, at around US$37,000 in December 2022.
The Brunei dollar is pegged to the Singapore dollar at a one-to-one ratio, and the Singapore dollar is legal tender in the Sultanate. The peg has provided the country with prudent monetary policy management from Singapore’s Monetary Authority of Singapore. Together with generous fuel and energy subsidies, this policy has helped keep inflation under control.
Brunei’s attempts to diversify the economy away from oil and gas production are focused on five priority sectors, downstream oil and gas industries, food, services, tourism, and information and communication technology. A well-educated and largely English-speaking population and an excellent infrastructure is helping to support these efforts.
In an Article IV assessment released in October 2023, the IMF reported that Brunei had begun to recover from the pandemic, with COVID-19 restrictions lifted and borders reopened in 2022. However, it added that the recovery had been hindered by reduced oil and gas production, despite rising commodity prices.
Commercial Risk – Stable at 7
Brunei is a middle-ranking country in which to do business, according to the World Bank, which ranked it 66th out of 190 in its 2020 Ease of Doing Business guide, behind Singapore, Malaysia and Thailand in Southeast Asia. The country continues to rank in first place, alongside New Zealand, in terms of “Getting Credit”. It ranked in 16th place worldwide for ease of starting a business. Moreover, significant improvements were seen in the local regulatory framework for the indicators on “Enforcing Contracts” and “Resolving Insolvency”.
Brunei also scores well in terms of corruption, ranking 38th out of 180 countries in Transparency International’s (TI) 2019 Corruption Perceptions Index. (There is no later ranking.) Only Singapore ranks higher than Brunei in Southeast Asia in 2019.
The Heritage Foundation ranked Brunei’s economy as the 43rd freest in its 2023 Index. The country moved five places up the rankings compared with the previous year. Brunei ranks 8th among 39 countries in the Asia–Pacific region, and its overall score is above the regional and world averages.
The Heritage Foundation said that the economy maintains a relatively high degree of market openness that facilitates trade and investment. The legal system generally secures private property and macroeconomic stability. The investment environment is relatively efficient and transparent, although the regulatory framework needs to be more streamlined to enhance overall economic competitiveness.
The banking system remains stable, and risks appear contained, according to the IMF’s October 2023 Article IV report. The IMF said the capital ratio of banks is strong at around 20% of risk-weighted assets in 2022, well above regulatory requirements (10%). Gross non performing loans (NPL) as a share of total loan declined from 3.6% in 2021 to 3.3% in 2022, and NPL (net of provisions) to capital ratio rose from 4.9% to 5.5%, due to write-offs. Banks continue to have abundant liquidity funded mostly by domestic deposits.
June Bulletin
Political Risk – Stable at 8
There is little obvious threat to Brunei’s political stability. There is no credible opposition, the government controls the media and Sultan Hassanal Bolkiah, 77, remains popular and shows no sign of wishing to relinquish the throne. The succession of Crown Prince Haji Al-Muhtadee Billah, when the sultan does step down, seems assured. That should ensure continuity of government economic and social policy.
Living standards remain very high on a global and regional basis, and there is no sign of any significant opposition to the status quo. Brunei has close military ties with the US, the UK and Australia that continue to provide protection against any possible regional instability.
Economic Risk – Stable at 7
The ASEAN+3 Macroeconomic Research Office (AMRO) reported in April that Brunei’s economy recovered strongly in 2023, with real GDP expanding by 1.4%. It added that growth was led by the services sector, notably transport and financial services. In the finance subsector, growth surged to 37.4% in 2023, buoyed by higher income from banking activities.
The oil and gas sector continued to contract in 2023, although the 2% decline was slower than the 7.3% seen in 2022, partly reflecting the progress made in rejuvenation efforts. Meanwhile, the downstream activities subsector declined by 2.8%, said AMRO, due to the planned facility maintenance of a major petrochemical refining plant.
AMRO reported that headline inflation fell sharply to 0.4% in 2023, reflecting lower commodity prices and post-pandemic supply-chain normalization. Food prices, however, remained higher than pre-pandemic levels, driven largely by higher prices for cereals, meat, and dairy produce.
The external position stayed strong, with the overall balance of payments in surplus at 0.5% of GDP in 2022, according to AMRO. The surplus reflected a surge in the current-account surplus to 19.6% of GDP, which helped offset the outflows in the financial account. AMRO expects the current-account surplus to have narrowed in 2023 to a still very healthy 16.0% of GDP, given the softer export outlook and lower production in both the upstream and downstream oil and gas sectors. International reserves are estimated at around US$5 billion in 2023.
The IMF’s October 2023 Article IV consultation said key policy challenges include the narrowing fiscal space, the need to shield the economy against energy price and output volatility, global decarbonization pressures, and ensuring inter-generational equity.
In April, the government said that plans were underway to build a trans-Borneo rail link were incorrect. The response was to an article published in Nikkei Asia claiming that a Brunei-based company called Brunergy Utama was going to build a US$70 billion rail network that would link Brunei with the Malaysian states of Sabah and Sarawak, and Kalimantan in Indonesia.
Intriguingly, Nikkei Asia quoted transport and information communications minister Shamhary Mustapha as saying the proposal had not been officially discussed at the government level, rather than ruling out the report completely.
Nikkei Asia also said that, according to a local government official in North Kalimantan, several discussions regarding the project had taken place with Brunei, but Indonesia had not committed to anything. Malaysia’s transport minister, Anthony Loke, was later reported as saying that the project was only at the proposal stage, and that no mega project should be considered valid until the government announced it.
Commercial Risk – Stable at 7
Allianz Trade (formerly Euler Hermes) rates Brunei as BB2 in its latest medium-term country risk rating. Malaysia is rated exactly the same, while Indonesia has a B1 rating.
In an April 2024 review of the economy, AMRO said that the banking sector’s financial soundness continued to be preserved. The capital adequacy ratio stood at 20.1% in 2023, well above the 10% minimum regulatory requirement. Overall asset quality generally improved, with the nonperforming loan ratio falling further to 2.6% in 2023, from 3.3% in 2022. The banking sector benefited from the rising interest-rate environment, resulting in a better-than-expected return on equity of 13.6% in 2023.
Environmental, Social and Governance (ESG) – Stable at 8
The Sustainable Development Report from Cambridge University Press assesses the progress of all 193 UN Member States on the SDGs. It provides a useful means of ranking Southeast Asian countries on their ESG progress.
Brunei is ranked 102 out of 166 in the 2023 report with a score of 65.7.
Environment – With a humid climate and low-lying topography, Brunei is particularly vulnerable to climate change. According to climatechange.gov.bn, the nation’s coastal areas already lie ‘up to 12 metres below sea-level’, leaving Brunei at risk of frequent flooding. Meanwhile, wildfires have destroyed approximately 3.23 thousand hectares of forest cover in less than 20 years. Brunei’s heavy reliance on fossil fuels, which currently make up 99.9% of its total energy sources, is a huge contributor to its climate-related disasters.
On a brighter note, the Brunei government has released ten key strategies to combat climate change, which they hope to complete by 2035. Aptly named, ‘The Brunei National Climate Change Policy’, the initiative includes planting 500,000 new trees to mitigate the effects of deforestation, which contributed to an 11.2% loss in forest cover between 2001 and 2005. The Government also plans to increase its renewable energy share to 30%, up the use of electric vehicles to 60% and prompt a reduction in emissions within the industrial sector.
Social – Brunei emerges well from the US State Department’s annual analysis of human rights. The latest report states that there are no reports of political prisoners or detainees, or of disappearances by or on behalf of government authorities. It adds that the government generally respects judicial independence, and there were no known instances of government interference with the judiciary.
Governance – Brunei companies are generally well regarded in terms of governance issues as is testified by the low corruption rating – see Commercial Risk.
June Bulletin
Environmental, Social and Governance (ESG) – Stable at 8
Brunei plans to set up a 30MW new solar power plant to ramp up to 200MW of the country’s solar energy by 2025, Brunei officials said in March 2024. In recent years, the government has committed to developing renewable energy such as solar power to promote energy structure and economic diversification.
Latest economic data
f – forecasts
1 – Trading Economics
Source: AMRO/IMF/ World Bank/ Asian Development Bank
Useful links
https://www.transparency.org/en/cpi/2021
https://www.imf.org/en/Countries/BRN
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