Brunei’s drives economic diversification forward

The tiny South-east Asian state is steaming ahead to diversify its economy beyond the oil and gas sectors on which it so depends. This should create a slew of opportunities for the country’s financial sector, but execution risk remains.

  • 19 Jul 2011
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When you think of Brunei Darussalam, you think of oil. The country has long been associated with the black gold it was blessed with, and now increasingly its natural gas too. And for good reason – these natural assets form the backbone of its economy.

The country’s oil and gas industries account for more than half of its economy and more than 90% of export earnings, according to the Brunei Economic Development Board (BEDB). But Brunei’s oil and gas resources are finite and noticeably declining.

All told, Brunei had proven oil reserves of 1.1 billion barrels of crude and 350 billion cubic metres of gas at the end of 2009, according to the Oxford Business Group (OBG) 2010 report on the country. Assuming the country continues to produce at the same rate it did during that year, it has 17.6 years of oil left and 30.7 years worth of gas.

It’s not going to run out soon, but today’s young Bruneians will eventually face a fossil fuel-less future.

Bruneians may have a pleasant standard of living on the back of the government’s oil revenues but foundations need to be built now to ensure the economy can survive the last drops of oil and gas leaving the ground.

None of this is news to the Bruneian government. Its Brunei Vision 2035 blueprint, created in 2009, places a strong emphasis on diversification and becoming a knowledge-based society. It’s a bold plan, and if it works the country will be in good stead.

However, the devil for Brunei is in the details and the execution.

Diversification plans

Concrete execution plans for diversification are already in place. The first step involves staying close to home: diversifying within the oil and gas space but away from simple upstream discovery and production.

Brunei plans to build a second refinery that will handle up to 200,000 barrels per day, in addition to its current one which caters for domestic demand. The refinery is to be built on Pulau Muara Besar, an island that will also serve as a deepwater port.

The government is also diversifying into the petrochemical space, having opened a methanol plant last year and with plans to build another.

Diversification strategies are not purely oil and gas-related. Plans exist to turn Brunei’s halal certification board into an international brand – the Brunei Halal Standard – that applies not only to food but also pharmaceuticals. Its main regional competitors are Malaysia and Indonesia.

Information and communication technologies (ICT) are another focus. The BEDB has set up technology incubators, partially funded by grants from the government, to foster entrepreneurship within the sector. ICTs are also being integrated into the education system via e-hijrah, a programme that aims to increase the digital capabilities of both teachers and students.

Tourism, too, is getting a look-in. With a targeted approach aiming to attract specific types of travellers who are more suited to a holiday in Brunei, the government seeks to reach 600,000 air arrivals by 2020 – triple its 2010 numbers – which calls for 11.5% year-on-year growth, according to Tourism Brunei.

In addition to the diversification plans, Brunei is kicking infrastructure development into gear via the BEDB. Last year the agency delivered a record 2,000 housing units by using sub-contractors, something that hadn’t previously been in vogue in Brunei. It has another 5,500 to go.

Added to this, the agency is working on new highways, a modern waste-management system and an airport refurbishment, along with the aforementioned deepwater port. That’s quite a set of tasks for an organisation of only 70 people.

Basic banking

The diversification and infrastructure plans bode well for Brunei’s private and financial sectors.

The BEDB has already used sub-contract labour prominently, and plans to use it in greater numbers. Banks can also win business, either by financing the projects directly or by financing the sub-contractors working on them. All this new property gives insurers new business too, starting with workplace-safety cover.

“There are business banking opportunities in some target segments,” says Standard Chartered’s Brunei CEO Lai Pei-Si. “Downstream industries from oil and gas will do better and better, as will oil and gas itself,” she predicts, adding that banking business will stem from domestic demand as well as warehousing and trading.

Baiduri Bank, the nation’s leading non-Islamic lender, also expects to play a large role in the projects in whatever capacity local banks are allowed to have direct involvement.

“[This may be] at the level of financing [the projects directly] or at the level of financing sub-contracting of these projects,” says general manager Pierre Imhof.

“We’re excited about these [projects] coming along, they will create more opportunities in infrastructure, staff support, everything,” adds HSBC’s deputy CEO Rosdi Amin Yaakub.

Yet the limitations of what remains a fairly basic banking system could also stymie these opportunities.

According to one senior Brunei-based banker, tapping the financing market for the second layer of players associated with large projects presents a good opportunity, “but getting their financial information is not easy and they’re complacent with their existing banking relationships”.

Some of the construction projects will be financed directly by foreign firms, but support activities required by development and construction companies also present an opportunity for Brunei’s bankers. These include housing and feeding foreign workers, maintaining facilities, clean-up, security and waste disposal.

“If they don’t want to declare their income, we can’t assess their financial standing,” says the banker. “So we look at their cash flow and what collateral they can give.”

“We manage [the lack of financial reporting] by knowing our customers a lot better,” says StanChart’s Lai. “In this country we take a lot of effort in building relationships and knowing people.”

“I feel there’s a great desire and seriousness to diversify into different areas, and now it’s about how quickly it can be executed,” she says. “But given the right government support and infrastructure investments they’ll be able to achieve it because the quality of the workforce is high.”

Overcoming conservatism

For all of Lai’s confidence, the major risk for Brunei’s future is its ability to successfully execute its noble plans.

A conservative country that is ruled by one family, Brunei is famous for caution and is not known for breakneck development in the same league as the Gulf states or Greater China. Moreover, its bloated public sector can sometimes get in the way. As one source tells Asiamoney, Bruneians can frequently prioritise procedure over the end objective.

Naysayers abound. “The refining project will not be that smooth,” says another senior Brunei-based banker who declined to be named. “It’s huge, it’s long and it requires a lot of financing, so it has to be [undertaken] with the major known and reputable counterparties.”

“Brunei is investing to generate added value for the country in employment, income and local business,” says the banker. “[The authorities] have to prove this investment will create employment, that they’ll be able to generate spin-off effects for contractors and banks. But that is also not clear yet.”

Nationalistic issues also come into play. Given the limitation of local expertise, Brunei has had to look outside its borders for advice on many of its grand plans, but this has not always gone down well.

“A number of local parties are not happy about the Japanese investment, that’s not the right approach,” says the banker, referring to the Japanese financing of the country’s first methanol plant, which was built last year.

Those local parties will soon have more to complain about. Four companies have been shortlisted for a tender to develop the second methanol plant, but they are either of Japanese or Middle Eastern origin, according to sources within the BEDB.

Despite being bearish on the prospects of Brunei’s larger projects, such as the refinery and the petrochemical developments, some are bullish on the country’s smaller diversification programmes.

“I believe in a lot of the smaller diversification projects that will come up faster, such as the halal industry, logistics and ICT,” posits the banker. “They are smaller projects which do not require huge investment but will give the image that Brunei is ready to attract investors.”

But not everyone agrees. “Clarity on [the halal board plans] is key if it’s going to be successful,” says a third senior Brunei-based banker who also declined to be named. “The plan is brilliant but how it will be executed – i.e. time and cost – will need to be a lot clearer.”

Creating capital markets

The country’s 2035 vision sets out some objectives tied to the diversification and development projects, one of which is “the promotion of investment, foreign and domestic, both in downstream industries as well as in economic clusters beyond the oil and gas industry”.

However, encouraging both foreign and domestic investment is much easier when there are active, liquid capital markets in the country.

Brunei lacks both a stock exchange and a secondary bond market. The only entity within the country to have issued bonds to date is the sovereign. Until January, the country didn’t even have a central bank. Its roles were managed in tandem by the Ministry of Finance and Singapore’s central bank (due to the Brunei dollar’s currency peg to the Singaporean currency).

But January 2011 saw the establishment of a new monetary authority, the Autoriti Monetari Brunei Darussalam (AMBD), which will be responsible for formulating and implementing monetary policy, the supervision of financial institutions and currency management.

The organisation may be in its infancy but its establishment shows that Brunei is serious about developing its financial markets as well as its roads and ports.

“The setting up of the AMBD is the first step in trying to get a capital market and investment climate up in this country,” says StanChart’s Lai.

One reason capital-market development has been slow is because Brunei is a small country. But in large part it has also been due to the conservatism of Bruneian investors.

“Local companies, even SOEs (state-owned enterprises), are not willing to take foreign-exchange risk,” says a senior Brunei-based banker. “They’re comfortable with the Singapore dollar but they definitely have to take more risks.”

But there are signs that this is changing.

Debt-market developments

Standard Chartered has been selling foreign-issued corporate bonds to high-net-worth individuals in Brunei since March last year. It has sold both conventional bonds and shariah-compliant sukuk (bonds that comply with Islamic law) although so far it has only sold investment-grade debt.

“We make it easier to invest by making sure the [subscription] sizes aren’t too large,” says Lai. “It introduces [customers] to the product.”

The take-up has been excellent. While declining to divulge sales numbers, Lai disclosed that 2011 sales in the first six months were already twice 2010 sales across the 10-month period between March and December inclusive.

And the bank plans to expand the product further: “Leveraging them is an opportunity but at the moment customers are not quite ready,” says Lai. “But that could really be a phase two.”

“Brunei issues sukuk but there is no secondary market,” posits a senior banker. “Big corporations have to take a bold step [to kick off securities issuance]; for example in Malaysia the first sukuk was done by Shell Malaysia.”

“I’ve always been in favour of activating an equity market,” says another senior banker. When asked about Brunei’s chronic lack of financial reporting he replied: “On a small equity market, the companies that would list would be the bigger banks and SOEs with decent accounting standards.”

“Unlike Malaysia where products are approved very quickly, the challenge in this country is how to create new products with a fast turnaround time,” adds the third Brunei-based banker. “Hopefully with the AMBD in place there will be a swift approval process.”

Waling the talk

It’s difficult to fault Brunei’s plans. Diversification is not only the right path to take but also a necessary one if it is to adequately prepare for the future.

The country now needs to plough ahead with the execution, not only in physical construction but also financial reform.

Firstly, Bruneian authorities need to ensure that there is a positive and long-term flow-on effect for local industry from the larger diversification programmes associated with the oil and gas industry.

This will require competence and human capital to effectively execute; something that the country will need to adequately prepare for as its diversification and development intensifies and becomes more complex. School curricula need to be updated and education programmes – such as e-hijrah – need to be expanded to include business, engineering and financial skills for its citizens.

Additionally, the country needs to start developing basic, liquid capital markets to spur investment. The Association of South-east Asian Nations economic integration project is a perfect opportunity for Brunei to step up to the plate as its regional neighbours develop. The stock exchange operators of Malaysia, the Philippines, Singapore and Thailand have announced that they will initiate cross-border trading and even tiny Laos has a stock exchange. Brunei is running out of excuses.

Apart from equities, the debt side of the equation should also not be too difficult to set up. Standard Chartered’s bond sales prove that local investor demand exists and local corporates, many of which are state-owned and could be considered sovereign proxies, need to consider corporate bonds as a funding method.

Finally, the new monetary authority needs to be vested with the requisite powers as an independent body separate from government to implement reforms and regulate nascent financial markets.

Brunei prides itself on being the only state with a Malay monarchy as its system of government. To date it has proved successful, having prospered and bestowed wealth and comfort on its citizens.

Its new challenge will be to turn that prosperity into something dynamic, diversified and sustainable. The good news is that it seems to be on the right track.

  • 19 Jul 2011

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
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1 Citi 38,857.97 184 9.39%
2 HSBC 38,447.58 227 9.29%
3 JPMorgan 34,744.34 142 8.40%
4 Bank of America Merrill Lynch 28,556.15 119 6.90%
5 Deutsche Bank 18,270.77 72 4.42%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
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1 JPMorgan 13,268.07 33 6.30%
2 Bank of America Merrill Lynch 11,627.56 29 5.52%
3 Citi 11,610.06 30 5.52%
4 HSBC 10,091.34 29 4.79%
5 Santander 9,533.17 25 4.53%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
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1 Citi 13,617.40 57 11.05%
2 JPMorgan 12,607.77 55 10.23%
3 HSBC 9,327.72 50 7.57%
4 Barclays 8,643.78 30 7.02%
5 Bank of America Merrill Lynch 6,561.15 18 5.32%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

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1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
3 ING 2,549.27 20 8.36%
4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
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1 AXIS Bank 5,944.45 123 18.53%
2 HDFC Bank 3,792.05 100 11.82%
3 Trust Investment Advisors 3,390.86 145 10.57%
4 Standard Chartered Bank 2,299.63 31 7.17%
5 ICICI Bank 1,894.86 51 5.91%