One of the largest exporters of oil and gas in Southeast Asia, Brunei Darussalam has long benefitted from its strong trade relationships with Japan, China and its ASEAN neighbours, building a robust trade surplus in the years to 2014 on the back of rising exports and elevated petroleum prices. The oil market’s mid-2014 turnaround has had a dramatic impact on the Sultanate’s trade balance, however, with export revenues tumbling after oil lost two-thirds of its value on global markets between June 2014 and February 2016.
Although Brunei Darussalam maintains a trade surplus, exports contracted significantly in 2015, and the outlook for 2016 is subdued as a result of a rising global oil glut. This has underscored efforts to reduce oil export dependency through new diversification measures, which should see manufacturing and industrial exports continue increasing their contribution to total trade in the coming years. At the same time, legal and regulatory reforms are already under way as authorities move to attract new foreign direct investment (FDI) in strategically important industries, including aerospace and defence, high-tech manufacturing, agribusiness, and the services sector.
In addition to significant oil and gas reserves, Brunei Darussalam’s well-educated, largely English-speaking population, geographic position in the heart of South-east Asia, well-developed infrastructure network, pro-business tax regime and strong government support for new FDI have given it a favourable investment climate, although the country remains dependent on oil revenues. Wawasan Brunei 2035, also known as Brunei Vision 2035, emphasises attracting new FDI as a key growth driver, and the government has launched several reforms aimed at improving FDI inflows to priority industries.
Brunei Darussalam’s main export markets as of December 2015, according to the Department of Economic Planning and Development (JPKE), were South Korea, Japan and Thailand, which accounted for 30.8%, 26.2% and 11.3% of total exports, respectively. Its largest import markets were Malaysia, Singapore and China, which accounted for 22.4%, 16.9% and 12.1% of imports, respectively. Oil and gas dominate the export base, accounting for over 92% of total exports at the end of 2015, and primary imports were machinery and transport equipment (34.9%) and manufactured goods (19.5%).
Despite recent turmoil in global oil markets, which have reduced the country’s trade surplus, substantial revenues from overseas investments made by the Sultanate’s sovereign wealth fund, the Brunei Investment Agency, which has around $40bn of assets under its control according to the Sovereign Wealth Fund Institute, continue to supplement government revenues. Robust reserves have helped cushion Brunei Darussalam from near-term oil shocks, and Bruneian citizens continue to benefit from a generous social welfare system — they do not pay taxes, have access to free education to the post-secondary level and receive free medical care and subsidised housing.
The relatively open economy is favourable to FDI and offers incentives to investors through the Brunei Economic Development Board (BEDB), Department of Industry and Energy, Prime Minister’s Office (EIDPMO) and Ministry of Foreign Affairs and Trade. The BEDB was set up in 2003 following the promulgation of the Brunei Economic Development Act, with the mandate to promote Brunei Darussalam as a preferred investment destination in four priority business segments, namely, life sciences, agri-business, ICT, and services. The board assists potential investors in navigating regulations and provides information on developmental requirements, the cost of doing business and project-specific information. Working in partnership with the Invest in Brunei Darussalam FDI Action and Support Centre, the BEDB uses an FDI fast-track system to streamline the process of obtaining permits, licences and approvals, including construction permits and foreign labour recruitment. All investors are assigned a dedicated account manager who acts as a single focal point and liaison officer. The EIDPMO, meanwhile, acts as the main coordinating agency for industrial development and investment in the primary sector, as well as in manufacturing and tourism. Like the BEDB, the department encourages and assists local and foreign investors in establishing new ventures, which produce goods for exports and local markets.
The Ministry of Foreign Affairs and Trade (MOFAT) was established in January 1984 and has operated under its current moniker since August 2005, following a merger with the former Ministry of Industry and Primary Resources (MIPR) International Relations and Trade Department. MOFAT’s International Trade Department plays a leading role in ASEAN economic cooperation, including economic integration, and it coordinates bilateral and regional trade negotiations.
The Investment Incentive Order (2001) and amended Income Tax Order (2001) are the primary pieces of legislation governing foreign investment in the Sultanate. Investment Order 2001 supports economic development in strategically important industrial and economic enterprises, through the EIDPMO, which offers investment incentives through a favourable tax regime. Although the Sultanate does not have a stock exchange, plans to create a securities market are reportedly under way.
Foreign ownership of companies is not restricted, although under the Companies Act, at least one of two directors of a locally incorporated company must be a resident of Brunei Darussalam, unless granted an exemption from the appropriate authorities.
The Investment Order sets out a list of pioneer industries offering investor incentives, with this concentrated largely on the non-oil economy. Pioneer industries include agri-business, including fertilisers and pesticides; construction; building and heavy equipment; chemicals; petrochemicals and plastics; consumer goods; environmental technologies; food processing; ICT; industrial equipment; marine technology; metal manufacturing; and some services. In the services sector, activities including consultancy and research, automotive and ground transportation, education, finance, ICT, media and entertainment, and travel are classified as pioneer.
Any company granted a pioneer certificate can benefit from incentives including a five-year exemption from the 18.5% corporate income tax — itself the second-lowest rate in ASEAN, after being reduced from 20% in 2015 — provided the business’ fixed capital expenditure is between BN$500,000 ($356,000) and BN$2.5m ($1.8m), as well as eight-year exemptions for more than BN$2.5m ($1.8m) in fixed capital expenditure, and 11-years for any project located in a designated high-tech industrial park.
Companies are eligible for exemptions from import duties on machinery, equipment, component parts, accessories and building structures, as well as taxes on imported raw materials not produced in Brunei Darussalam. The EIDPMO may also offer incentives to companies proposing export-oriented projects, including income tax and import duty exemptions.
Trade & FDI Contraction
Falling oil prices had a noticeable impact on trade in 2015. The JPKE reports that Brunei Darussalam’s total trade in December 2015 rose by a modest 0.6% over November to hit BN$996.3m ($708.9m), of which exports comprised BN$672m ($478.1m) and imports BN$324.4m ($230.8m). However, foreign trade contracted by 23.5% year-on-year (y-o-y) in December 2015, from BN$1.3bn ($925m) in December 2014, while total annual trade fell by 28.3% to BN$12.9bn ($9.2bn).
Brunei Darussalam’s trade surplus also fell in 2015, with the JPKE reporting that although the surplus rose by 12.9% in December 2015 to reach BN$347.7m ($247.4m), the surplus declined 48.9% during the year to BN$4.5bn ($3.2bn), from BN$8.9bn ($6.3bn) in 2014. In December 2015, oil and gas exports accounted for BN$619.9m ($441.1m) in export revenues, or 92.2% of the total, followed by chemicals, at BN$20.3m ($14.4m), machinery and transportation equipment, at BN$20.1m ($14.3m) and manufactured goods, at BN$3.7m ($2.6m).
Net FDI has declined in recent years, with the JPKE reporting that FDI has fallen below 2010 levels, when net investment reached BN$655.5m ($466.4m). Investment reached a peak of BN$1.08bn ($768.4m) in 2012, before falling to BN$719.5m ($511.9m) in 2014, and declining further in 2015 to BN$238.2m ($169.5m). Of total inflows, over 72%, or BN$244.2m ($173.8m), was concentrated in mining and quarrying, including oil production, compared to BN$76.7m ($54.6m) in other activities, BN$12.3m ($8.8m) in construction, and BN$5.1m ($3.6m) in financial and insurance activities. Singapore was the largest investor in 2015 with BN$69.2m ($49.2m), followed by the UK with BN$59.1m ($42.1m).
In the wake of slowing trade growth and Brunei Darussalam’s decline on the World Bank’s 2015 “Doing Business” survey — the Sultanate’s ranking was down three spots to 105th in 2015 — the MIPR called for reforms, and in January 2015 the Miscellaneous License Act was amended to cut down on the wait time for new businesses to start operations, enabling low-risk businesses such as restaurants and retail outlets to commence immediately. The previous year the Sultanate had consolidated final construction inspections under a single agency, the Authority for Building and Construction Industry, which now acts as a one-stop shop in issuing pre-construction approvals and building permits. These efforts paid off; in the 2016 “Doing Business” report, Brunei Darussalam climbed 21 spots to 84th place, as its ranking in the “starting a business” category soared 107 places to 74th.
In addition to business licensing reforms, the government is intensifying its focus on diversification efforts, with the intent to attract new investment in its downstream energy and non-oil sectors. According to the US Department of State’s 2015 Investment Climate Statement for Brunei Darussalam, considerable opportunities for foreign investment exist in the aerospace and defence, agribusiness, construction, petrochemicals, energy and mining, environmental technologies, food processing and packaging, franchising, health technologies, ICT, Islamic finance and services sectors.
The government has recognised this and sought to develop these sectors through an array of new policy and infrastructure, including the $20.5m first phase of a planned halal industrial park, the Bio-Innovation Corridor, which will eventually span 500 ha and employ 28,000 people; the One Village One Product (OVOP) initiative, which markets domestic products; and the creation of a new FDI arm and small business promotion centre. In December 2015, the Prime Minister’s Office established four new divisions under its Department of Energy and Industry, including Innovative Technology and Creative Industry, Global Halal Industry Development, Cottage Industry and Cooperatives, and Business Environment.
New FDI Arm
In January 2016 His Majesty Sultan Haji Hassanal Bolkiah announced plans for a wave of sweeping economic reforms to improve diversification and reduce oil export dependency, including the creation of a new agency, the FDI and Downstream Industry Committee (FDIDIC), which will be tasked with implementing reforms to improve the country’s competitiveness. Sultan Bolkiah also announced plans to launch a centre which will support and promote small- and medium-sized enterprises (SMEs), the SME Centre (see Economy chapter.)
The new FDI arm complements the government’s existing OVOP initiative, which aims to support export development of 162 domestically manufactured products. Investment in promoting OVOP is set to rise in 2016, after the Ministry for Home Affairs told media in January that it is seeking a permanent location to market OVOP products to be located in the capital city of Bandar Seri Begawan or in nearby Gadong. The Sultanate’s government, through its Halal Industry Innovation Centre, has also established the Bio-Innovation Corridor, formerly the Brunei Agro-Technology Park, to attract FDI in the food and agricultural industries. The corridor targets transforming Brunei Darussalam into a regional, internationally recognised halal industrial destination, featuring production of halal food products, cosmetics, pharmaceuticals, biotechnology and logistics. The agro-technology park was rebranded in February 2014 and is expected to be rolled out in three phases, linking with three industrial zones in China, bolstering trade ties between the two nations.
Outside of domestically-produced and halal goods, the government is also hoping to expand investment in high-tech industries which will help the country improve regional and international competitiveness. In February 2016 Dato Erywan Yusof, deputy minister of foreign affairs and trade, told local media the country should also be working to improve investment within high-tech industries such as ICT and renewable energy, in addition to other more labour-intensive industries, which will help maintain employment and support development of knowledge-based industries and a highly skilled workforce.
The aerospace and defence sector has welcomed new investment, after Canadian aircraft training firm CAE established a multi-purpose training centre (MPTC) in Bandar Seri Begawan in 2012, as a joint venture with the government of Brunei Darussalam. The development of the integrated training facility for the CAE Brunei MPTC was completed in 2014 and the facility officially started training in September of the same year. It is internationally accredited to provide aviation and crisis management training, the only such facility in the region.
The renewable energy sector also holds further investment opportunities. The government released the “Energy White Paper” in 2014, outlining its vision for leveraging oil wealth to diversify the economy and increase FDI, in part through renewable energy investment and setting ambitious renewables targets for 2035 (see Energy chapter). Renewable energy plans have also received a boost from recent trade agreements with the US. In March 2014 the Export-Import Bank of the US (EXIM) and the Energy and Industry Department of Brunei’s Prime Minister’s Office signed a memorandum of understanding to explore regional trade and energy business opportunities, as well as the potential for a $1bn loan from EXIM to finance exports in support of selected projects in the region. J J Liao, the president of Taiwan’s KD Holding, also announced in March 2016 that the company is interested in forming a public-private partnership for a renewable energy project.
The US has grown to become an increasingly important trade partner for Brunei Darussalam, although the Sultanate’s trade with ASEAN far outstrips the US. MOFAT reported in January 2016 that Brunei-ASEAN trade reached BN$2.1bn ($1.5bn) between 2008 and 2014, of which BN$447m ($318m) were imports from ASEAN, compared to BN$1.7bn ($1.2bn) of exports. Two key provisions, the ASEAN Trade in Goods (ATIGA) agreement and Common Effective Preferential Tariff (CEPT), supported flourishing trade growth, with exports under these schemes reaching a high of BN$957m ($680.9m) in 2003 , and a low of BN$321,989 ($229,000) in 2008. In 2014 exports under the ATIGA/CEPT agreements were valued at BN$169m ($120.2m). In contrast, the Sultanate’s exports to China under the ASEAN-China FTA amounted to BN$156.7m ($111.5m) over the same period and imports BN$244.7m ($174.1m). Exports through the ASEAN-Korean FTA stood at BN$14bn ($10bn), largely due to LNG sales, while imports were BN$692m ($492.4m). Trade with India is also high, with the ministry reporting that exports under the ASEAN-India FTA reached a cumulative BN$5.7bn ($4.1bn) between 2010 and 2014.
Expanding Trade Relations
Trade relations with China have been on the rise, as the Sultanate seeks to attract new investors with the benefit of easy access to Chinese markets, in addition to witnessing an influx of Chinese FDI domestically. Chinese firm Hengyi is in the midst of building a new $4.3bn refinery in Puala Muara Basar (see Energy chapter), and authorities are also keen to develop the proposed Brunei-Guangxi Economic Corridor, a trade link with China’s Guanxi province, which will act as a tariff-free, direct supply-chain link spanning three Chinese industrial parks and the Sultanate’s Bio-Innovation Corridor. The project is expected to attract $500m of joint investment into bio-innovation industries.
Brunei Darussalam is also likely see trade with Pacific Rim countries including the US, Japan, Australia and Canada rise significantly after an October 2015 signing ceremony between Trans-Pacific Partnership (TPP) member states. The Sultanate stands to gain better access to nearly a dozen markets when the TPP agreement comes into effect (see analysis).