Economic diversification gathers pace as oil reliance wanes: CSPS

August 4, 2021

BANDAR SERI BEGAWAN – Brunei has made “substantial progress” in diversifying its oil-driven economy in recent years, and should continue harnessing its strengths in energy to build an internationally competitive industrial sector, said the Center for Strategic and Policy Studies (CSPS).

Reviewing Brunei’s diversification efforts in its latest economic report, the think tank said Brunei’s fundamental economic structure has largely remained unchanged for decades as it is still reliant on hydrocarbons.

“There was some indicative diversification success during the 1990s, but similar to the trend of other oil exporters, concentration increased during the 2000s boom,” it added.

However, the start of Hengyi Industries’ oil refinery and petrochemical operations in 2019 has seen decreasing economic dependence on the upstream oil and gas sector.

Oil and gas accounted for 57 percent of nominal gross domestic product (GDP), 91 percent of merchandise exports and 85 percent of government revenue, according to 2018 data.

By 2020, the hydrocarbon sector’s share in nominal GDP, merchandise exports and government earnings declined to 47 percent, 82 percent and 60 percent, respectively.

In contrast, downstream activities have been the largest driver of economic growth last year with a nine percent rise.

CSPS said the volatility in global oil prices also translates to uncertainty in the Brunei economy.

Revenue from the petroleum industry had plunged 69.9 percent in the 2020/21 fiscal year, following a major oil price collapse triggered by the COVID-19 pandemic.

“Diversification helps to lower volatility by stabilising export revenues and hence provide a more stable path for growth and development.

“Besides buffering against commodity price shocks, economic diversification also matters because it is generally accompanied by industrial upgrading through technology diffusion and a shift toward higher productivity sectors and high-paying jobs,” CSPS added.

The think tank further said there is a need to prepare for future resource depletion, and avoid adverse effects arising from a resource windfall.

‘Diversifying from oil is difficult’

In its analysis of export diversification trends in oil-producing countries over a 50-year period, CSPS said economic diversification has long been viewed as a policy priority for resource-dependent countries due to fluctuating commodity prices.

Oil exporters usually diversify by moving from products they specialise in to other areas that require similar capabilities.

“In this context, oil might be incredibly hard to diversify from as the oil sector generates relatively few spillovers into other sectors.

“Crude oil is among the products with the lowest complexity rating, indicating that it shares very few characteristics with other products, and hence very difficult to diversify from,” CSPS said.

Moreover, policy advice to help oil producers diversify their economies usually focuses on improving the business environment, investing in human capital and infrastructure, as well as ensuring fiscal and monetary discipline.

Shift to renewable energy

Noting that there is no one-size-fits-all policy, CSPS said successful diversification requires taking into account the country’s endowments, geography, institutions, governance and implementation capacity.

“In the case of Brunei, it should continue to exploit its competitive advantage in energy to build an internationally competitive industrial sector and by moving downstream and expanding into higher-value and niche markets.

“Co-locating petrochemical facilities with refineries as an operational synergy is an example of capturing more domestic value from hydrocarbons,” added CSPS.

Slated to start operations later this year, Brunei Fertilizer Industries’ new ammonia and urea plant also has a competitive advantage as a result of relatively low input costs, such as land, labour, power, and feedstock (natural gas).

CSPS said Brunei can also tap into the potential of renewables, especially solar resources.

Earlier this year, the government said three new solar plants would be built within the next five years, while nine potential sites had been identified for the deployment of medium-to-long term floating solar farms.