## 1.  Real and Fiscal Indicators

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### Context
- Brunei’s economy has been adjusting to declining oil production since 2010 and lower oil and gas (O&G) prices since 2014, with wide-ranging reforms launched in 2015 aimed at:
  - (i) ensuring long-term fiscal sustainability and intergenerational equity, and
  - (ii) fostering economic diversification by improving the business climate, developing the financial sector, attracting FDI in priority business clusters, and supporting micro, small and medium-sized enterprises (MSMEs).
- In 2018 the O&G sector accounted for:
  - 58 percent of GDP,
  - 81 percent of government revenues, and
  - 95 percent of exports.
- Sizable sovereign wealth buffers, virtually no public debt, and ample international reserves underpin resilience and provide scope for gradual adjustment.
- Progress on reforms broadly in line with Fund advice; progress on non-O&G revenue measures, energy subsidy reforms, and improvements in data compilation and dissemination could be accelerated.

### Recent developments, outlook, and risks
- Growth and production:
  - Growth in 2018 slowed to 0.1 percent, due to unscheduled maintenance of O&G fields.
  - Non-O&G sector grew 2.5 percent year-on-year in Q1 2019.
  - Overall growth declined to -0.5 percent in Q1 2019 due to scheduled maintenance of O&G fields.
- Inflation:
  - Average inflation in 2018: 0.1 percent.
  - Inflation in May 2019: -0.2 percent.
- Unemployment (Appendix III):
  - Unemployment rate increased to 9.3 percent in 2017 from 6.9 percent in 2014.
  - Youth unemployment rate increased to 28.9 percent from 25.3 percent.
  - Unemployment rate of locals: 11.5 percent in 2017.
  - Youth unemployment rate of locals: 31.7 percent in 2017.
  - Female labor force participation rate declined to 56.5 percent.
- Fiscal consolidation and balances (Text Table 1, fiscal year April–March, millions of BND and percent of GDP):
  - Revenue: 34.4 (2014/15), 21.7 (2015/16), 22.5 (2016/17), 22.7 (2017/18), 32.6 (2018/19).
    - Oil & Gas: 29.4, 15.9, 13.4, 16.2, 25.1.
    - Non-Oil & Gas: 5.0, 5.9, 9.2, 6.5, 7.4.
  - Expenditure: 35.4, 37.1, 39.3, 35.6, 32.3.
    - Current: 26.6, 29.2, 31.2, 30.4, 29.6.
    - Capital: 8.8, 8.0, 8.1, 5.2, 2.7.
  - Overall Balance: 2/-1.0, -15.4, -16.8, -12.9, 0.3.
  - Non-O&G Balance (% of Non-O&G GDP): -70.5, -65.1, -59.6, -61.3, -54.9.
  - Nominal GDP (millions BND): 20,581 (2014/15), 17,063 (2015/16), 15,905 (2016/17), 17,048 (2017/18), 18,440 (2018/19).
  - Nominal non-O&G GDP (millions BND): 7,735, 7,600, 7,449, 7,508, 7,636.
- External sector:
  - Current account surplus narrowed to 7.9 percent of GDP in 2018.
  - Surplus expected to rebound on current policies as downstream exports rise and temporary imports fade.
- Exchange rate and reserves:
  - The peg to the Singapore dollar remains appropriate and is assessed to help keep inflation low and preserve macroeconomic stability.
  - Official reserves assessed to remain above adequacy benchmarks.
- Banking sector:
  - Capital adequacy ratio increased from 18.6 percent in 2018Q1 to 20.7 percent in 2019Q1 (regulatory minimum 10 percent).
  - Overall liquid asset ratio hovering around 50 percent.
  - Gross non-performing loans and financing ratio: 5.1 percent.
  - Return on assets increased to 1.5 percent from 1.2 percent.
  - Return on equity increased to 10.4 percent from 8.6 percent.
  - Private sector credit recovered from -3.9 percent to -3.0 percent.
  - Total banking sector loans increased from -2.0 percent to 5.4 percent (includes loans to government-linked companies (GLCs)).
- Outlook:
  - Growth projected to accelerate to 1.8 percent in 2019, reflecting stronger O&G activities and planned investment.
  - Medium-term improvement expected from start of operations of Hengyi refinery and Brunei Fertilizer Industries and stronger O&G activities from 2020 onward.
  - Fiscal position would deteriorate in 2019 owing to lower O&G prices and higher capital spending, but expected to recover in the medium term.
  - Inflation expected to remain low, but positive, over the medium term.
  - Current account expected to increase as exports of O&G and downstream products strengthen and temporary imports fade.
  - Private sector credit growth expected to recover in line with non-O&G growth.
- Risks:
  - Downside near-term risks: lower-than-expected energy prices; disruption in domestic O&G production from aging fields; lower-than-expected production from new projects; delays in large downstream FDI projects; a sharp tightening of global financial conditions and rising protectionism.
  - Upside risks: geopolitical tensions pushing O&G prices higher; asset rejuvenation and planned exploration delivering higher-than-expected O&G production.
  - Adverse scenario illustration:
    - Staff assumes medium-term O&G prices fall back to the lowest levels observed in 2016 (oil price at US$34.4 and gas price at US$6.4) and remain there.
    - In this low probability scenario, the fiscal deficit is projected to be lower by about 10 percentage points over 2019-2024 compared to the baseline, requiring use of sovereign asset funds and undermining intergenerational equity.
- Authorities’ views:
  - Authorities broadly agreed with recent developments assessment but are more optimistic on short-to-medium-term outlook due to upstream investment and scheduled asset rejuvenation.
  - Hengyi refinery may start operations this year, potentially boosting O&G and non-O&G activity.
  - Authorities are implementing active labor market programs, including Bruneianization, to reduce unemployment.

### Macroeconomic policies — A. Continuing Fiscal Consolidation and Reducing the Procyclicality of Fiscal Policy
- Fiscal actions and measures:
  - FY2019/20 budget formulated on more realistic expenditure assumptions; recent years’ spending outturns averaged about 10 percent higher than budgeted.
  - Medium-term fiscal consolidation program introduced to help each ministry formulate consolidation plans and rebalance the budget toward growth-promoting activities.
  - Consolidation initiatives include corporatization and privatization, public-private partnerships, evaluation of subsidies, fiscal management enhancement, revenue diversification, and amalgamation of the government’s asset management system.
- Staff view and metrics:
  - Staff supports consolidation but calls for more ambition to ensure long-term sustainability and move closer to intergenerational equity.
  - Estimated gap between non-O&G balance and level consistent with intergenerational equity: about 10 percent of non-O&G GDP in 2024.
  - Brunei’s fiscal buffers and no public debt provide space for gradual adjustment.
- Staff recommendations for medium-term reforms:
  - Continue reforming public services and the wage bill:
    - Foster public sector productivity and incentivize Bruneians toward private sector jobs.
    - Contain wage bill by streamlining civil service vacancies.
  - Reform fuel subsidies in line with IMF technical assistance (TA):
    - TA estimates fiscal cost of fuel subsidies at 1-1.5 percent of GDP.
    - Subsidies encourage excessive consumption and inefficient capital allocation and benefit wealthier groups more than the vulnerable.
    - Recommend comprehensive reform strategy with clear communication and compensatory measures to protect the vulnerable.
  - Rebalance budget spending toward growth-enhancing activities:
    - Reduce untargeted subsidies (e.g., housing and food).
    - Promote more efficient energy and water use.
    - Prioritize spending on physical infrastructure (public transportation), human capital (education and training), institutional frameworks, MSME support, active labor market programs, and digitalization.
  - Increase non-O&G revenue:
    - Recalibrate property taxes, expand excise taxes, and adopt a Goods and Services Tax (GST).
- Scenario impacts and fiscal frameworks:
  - Adjustment scenario (gradual reform of fuel subsidies and lower wage bill) would lead to an additional reduction in the deficit path by 1.4 percent of GDP on average annually relative to the baseline (Text Table 2).
    - This would reduce the gap between the non-O&G balance and the intergenerational equity-consistent level to 7 percent of non-O&G GDP in 2024.
    - Achieve sustainable long-term non-O&G deficit level in 10 years instead of 15 under the baseline.
  - Text Table 2 (calendar year basis, percent of GDP, cumulative 2019-2024):
    - Fiscal balance under Baseline scenario: -11.5 (2019), -11.3 (2020), -11.1 (2021), -10.5 (2022), -9.4 (2023), -8.0 (2024), cumulative -61.9.
    - Policy adjustments1/: -11.5 (2019), -10.7 (2020), -10.1 (2021), -9.1 (2022), -8.0 (2023), -6.6 (2024), cumulative -55.9.
      - 1/ Policy adjustments relative to the baseline: containing wage bill (0.2 percent of GDP) and fuel subsidy reform (1.2 percent of GDP) gradually from 2020 to 2022, and sustained in the medium term.
- Recommended institutional reforms:
  - Adopt a formal medium-term fiscal framework (MTFF) including aggregate and sectoral ceilings and fiscal risk analysis.
  - Incorporate MTFF into a fiscal strategy with strategic prioritization of expenditure.
  - Strengthen fiscal transparency by publishing detailed budget execution data and reconciling projections with outcomes.
  - Implement a treasury single account and a financial management information system to enhance budget control and monitoring.
- Digitalization measures:
  - Integrated beneficiary databases to reduce inclusion and exclusion errors in social safety nets.
  - E-procurement and e-invoice procurement system to generate budgetary savings, promote competition, increase transparency, and reduce corruption vulnerabilities.
  - Support creation of a National Centralized Database for welfare assistance, with emphasis on privacy and cyber security.
- Authorities’ views:
  - Agreed on need for gradual fiscal consolidation.
  - FY2019/20 budget aligns with realistic spending assumptions and does not ease fiscal policy.
  - Consolidation to be a "whole of government" approach with ministry-level Policy Review, Sector Reform Plan, and Fiscal Consolidation Plan.
  - Further corporatization planned; subsidy reforms to be assessed thoroughly and implemented gradually with protections for vulnerable groups.
  - Introducing smart metering for electricity and water to reduce leakages; initiatives to reduce fuel subsidies without affecting vulnerable groups.
  - Strengthened monitoring via e-invoice system for procurements.
  - Reviewing tax policy and structure, feasibility to broaden tax base, and implementing a medium-term expenditure framework to focus more on the non-oil balance.

### Economic diversification: progress, constraints, and policy recommendations
- Priority clusters and constraints:
  - Authorities focus on five priority business clusters to support Wawasan Brunei 2035: Downstream O&G, Food, Tourism, Services, and ICT.
  - Constraints: small size limits economies of scale; private sector activity remains weak, with a strong preference for public sector employment that limits private sector growth.
  - Staff view: initiatives are commendable but challenges remain; continued efforts needed to improve business environment, attract quality FDI, enhance human capital, and reform labor market to foster private sector-led growth and reduce unemployment.
- Business environment and regulatory reform:
  - Notable improvement in World Bank Doing Business scores from 2016 to 2019, with strong progress in access to credit and starting a business.
  - Remaining weaknesses: further reforms needed for ease of doing business in registering property and trading across borders.
  - Policy implication: make regulatory framework more consultative, transparent and predictable to improve business environment.
- FDI attraction and trade facilitation:
  - Brunei has attracted sizable FDI in the five business clusters, mainly in the downstream O&G sector.
  - Potential enablers: expansion and modernization of Muara Port and trade agreements (for example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP) may enhance FDI attractiveness and global integration.
  - Needed actions: generate stronger positive spillovers from FDI to the domestic economy, integrate local MSMEs into supply chains, improve trade facilitation (advance rulings, information availability, formalities), link the National Single Window and the ports’ Equipment Interchange Receipts.
  - Ongoing reforms: introduction of the common online platform (the National Single Window); progress in advance rulings as part of CPTPP preparation.
- Human capital, labor market, and private sector employment:
  - Current initiatives: JobCenter Brunei, I-Ready, and the Center for Capacity Building to foster job opportunities and job matching.
  - Recommended reforms: continue labor market and civil service reforms to encourage Bruneians to create and seek private sector jobs; implement incentives for private sector employment (align public and private sector wages and benefits, lower reservation wages), support entrepreneurship, target human capital investment for the five priority clusters, continue supporting MSME development while holding recipients accountable.
- Digitalization as a diversification enabler:
  - Rationale: Brunei’s young and tech-savvy population makes digitalization a priority cluster.
  - Policy focus: upgrade physical and soft infrastructure and improve education quality; support innovation and job creation where e-commerce can overcome small market-size constraints; promote initiatives such as coding bootcamps.
  - Institutional steps noted by authorities: establishment of the Digital Economy Council and the Unified National Networks.

### Financial sector development, stability, and integrity
- Structure and key statistics:
  - Banking sector accounts for 83.3 percent of total financial sector assets, equivalent to about 100 percent of GDP.
  - Islamic banks account for 65.6 percent of banking assets.
  - Banks’ offshore assets represent 53 percent.
  - Total domestic credit provided by the financial sector stands at about 30 percent of GDP.
- Blueprint and reforms:
  - Financial Sector Blueprint 2016–25: broaden investor base, establish a secondary bond market, develop infrastructure and rules for a stock exchange.
  - Develop Brunei as an international Islamic finance hub in niche areas; issue sukuks at longer maturities to build a yield curve.
  - Introduce conventional and Sharia-compliant overnight standing facilities to support liquidity management.
  - Implement Bureau Credit Score to improve access to credit and transparency in lending.
  - Publish Digital Payment Roadmap 2019-25 and issue a fintech regulatory sandbox.
- Supervision and macroprudential priorities:
  - Implementation of IFRS 9 by financial institutions welcomed.
  - Implementation of all three pillars of Basel II seen as important.
  - Develop Domestic Systemically Important Banks framework, a top-down stress testing framework, and plans to introduce the Counter-Cyclical Capital Buffer.
  - Need to monitor risks from external shocks given size of offshore assets.
  - Planned publication of first financial stability report encouraged.
  - Need to establish a bank resolution framework and contingency planning for crisis management; a working group has been set up to develop the framework including banks’ recovery plans.
  - Support for progress in strengthening the AML/CFT framework and additional measures for the upcoming mutual evaluation; coordination among agencies underscored.

### Data, dissemination, and capacity building
- Data needs and actions:
  - Address delays in releasing national account and balance of payments data and increase data quality.
  - Strengthen capacity on gross external debt reporting.
  - Commitment to international data standards and best practices, including adoption of IFRS 9.
  - Plan to publish the National Summary Data Page (NSDP) in line with recent IMF TA on e-GDDS.
  - Authorities plan to request TA from the IMF on balance of payments and national account compilation.
  - Authorities expressed interest in IMF TA and trainings and requested IMF flexibilities on conditions for providing these programs for Brunei Darussalam.

### Staff appraisal and consolidated policy recommendations
- Macroeconomic outlook and risks:
  - Brunei’s economy has been adjusting to lower O&G prices since 2014 with wide-ranging reforms.
  - Growth expected to pick up in 2019 with medium-term outlook improving due to pickup in O&G sector and large investment projects.
  - Risks: future oil production and prices remain uncertain.
- Fiscal policy recommendations:
  - Support authorities’ fiscal consolidation program, but more ambition needed to align fiscal position with intergenerational equity considerations.
  - Over the medium term, staff recommends:
    - (i) continue reforms in public services and the wage bill, including streamlining civil service vacancies,
    - (ii) reform fuel subsidies,
    - (iii) rebalance further budget spending toward growth-enhancing activities,
    - (iv) increase non-O&G revenues.
  - Adopt a formal medium-term fiscal framework to control spending and delink it from O&G revenue fluctuations.
  - Use digitalization to improve public financial management.
- Monetary and external assessment:
  - The peg to the Singapore dollar remains appropriate as a credible nominal anchor and for financial stability.
  - External position assessed to be weaker in 2018 than fundamentals; current account balance expected to rebound over the medium term as new downstream exports rise.
- Overall support:
  - Staff supports authorities’ initiatives for diversification and financial sector development while urging continued reforms, monitoring of offshore exposures, strengthening AML/CFT, and closing data gaps.

### Key quantitative indicators and projections (selected)
- Real GDP growth (row as presented): 1/-2.5-0.4-2.5 1.3 0.1 1.8 4.7 3.6 3.5 2.4 2.1
- Oil production ('000 barrels/day): 126 127 121 113 112 115 118 122 126 129 132
- Natural gas output (millions cu. ft./day): 1,170 1,228 1,205 1,234 1,184 1,205 1,246 1,291 1,342 1,382 1,421
- Average Brunei oil price (U.S. dollars per barrel): 104.45 53.94 44.65 59.97 33.26 55.61 59.15 59.85 59.05 59.05 59.3
- Consumer prices (period average, percentage change): -0.2 -0.4 -0.7 -0.2 0.1 0.1 0.2 0.2 0.2 0.2 0.2
- Nominal GDP per capita (2018): US$30,668
- Nominal GDP (millions of Brunei dollars) (row as presented): 21,664 17,778 15,748 16,747 18,301 16,907 17,281 17,498 17,879 18,213 18,575
- Total revenue (percent of GDP, row as presented): 37.7 24.2 17.7 26.0 28.6 23.9 24.1 23.8 23.6 24.2 24.9
- Oil and gas revenue (percent of GDP, row as presented): 32.9 18.4 12.3 17.4 23.4 17.9 18.1 17.6 17.4 18.0 18.8
- Total expenditure (percent of GDP, row as presented): 34.1 38.7 39.4 36.6 32.2 35.4 35.5 34.9 34.1 33.5 32.9
- Overall balance (percent of GDP, row as presented): 3/ 3.6 -14.5 -21.7 -10.6 -3.6 -11.5 -11.3 -11.1 -10.5 -9.4 -8.0
- Non-oil and gas overall deficit (percent of non-oil and gas GDP, row as presented): -71.5 -68.9 -67.7 -57.1 -58.6 -60.0 -58.2 -55.8 -53.6 -52.5 -51.3
- Current account (in percent of GDP): 31.9 16.7 12.9 16.4 7.9 8.5 12.0 13.8 15.9 17.6 19.8
- Exports (millions of U.S. dollars): 11,149 6,127 4,813 5,475 6,470 4,952 7,180 8,098 8,474 8,723 8,868
  - Oil and gas exports (millions of U.S. dollars): 9,604 5,909 4,321 5,021 6,114 4,775 4,801 4,724 4,876 5,015 5,148
- Imports (millions of U.S. dollars): 3,670 3,217 2,659 3,072 4,105 3,347 5,022 5,674 5,710 5,629 5,366
- Gross official reserves (millions of U.S. dollars): 3,471 3,211 3,322 3,300 3,221 3,327 3,435 3,543 3,654 3,764 3,876
- Reserves in months of next year's imports of goods and services: 8.6 9.0 9.2 7.0 8.3 6.3 5.9 6.0 6.2 ...
- Banking and monetary indicators:
  - Broad money (M2) (percent change, y/y): 0.9 1.5 3.2 -1.8 1.5 -0.4 2.8 3.9
  - Private sector credit (percent change, y/y): 1.8 5.9 1.8 2.6 -6.2 -5.3 -3.1 0.4
  - NPL to total loans (percent): 6.8 5.7 5.0 4.6 5.9 4.2 4.8 ...
  - Regulatory capital to risk-weighted assets (percent): 20.9 19.4 21.4 21.1 21.5 18.1 18.4 ...
  - Central bank external assets (net, millions of Brunei dollars, sample row): 3,632 3,875 3,957 4,141 4,354 4,028 4,012 4,111 4,218

### Risk Assessment Matrix — key risks and recommended responses (summary)
- Key risks (time horizon; likelihood):
  - Disruption in domestic O&G production caused by aging fields and lower than expected production from new projects (short- to medium-term; high).
  - Large swings in energy prices (short- to medium-term; medium).
  - Higher O&G production from asset rejuvenation (short- to medium-term; low).
  - Delays in reforms and FDI project implementation in the non-O&G sector (short- to medium-term; high).
  - Weaker-than-expected global growth (short- to medium-term; high for some channels).
  - Rising protectionism and retreat from multilateralism (short- to medium-term; high).
  - Sharp rise in risk premia (short-term; high).
- Expected impacts:
  - Production or price declines would worsen fiscal and external balances, complicate fiscal consolidation, and could weaken banks’ balance sheets.
  - Higher-than-expected production/prices would boost exports and fiscal revenues with positive spillovers.
- Recommended policy responses:
  - Re-prioritize current expenditure, reform subsidies, raise non-O&G revenues, and accelerate diversification initiatives to mitigate production disruptions.
  - Maintain a consolidating fiscal trajectory to buffer against energy price swings.
  - Continue investment climate reforms and improve public financial management to reduce delays in FDI projects.
  - Continue prudent management of sovereign asset holdings and consider strategic hedging against sharp rises in risk premia.

### Exchange rate, external sector, and fiscal frameworks
- Exchange rate and reserves:
  - Bilateral nominal exchange rate vis-à-vis the US dollar showed some volatility, but trade-weighted NEER and REER remained stable.
  - Hydrocarbon exports account for 95 percent of exports.
  - FDI expected to continue over the medium term driven by downstream investment projects; portfolio flows subdued.
  - Official reserves in 2018: 29 percent of broad money and 8.7 months of imports.
  - Level of official reserves around 180 percent of the Fund’s composite metric in 2018—above the recommended 100–150 percent adequacy range—and projected to increase over the medium term.
- Exchange-rate arrangement:
  - Peg to the Singapore dollar remains appropriate: provides a credible nominal anchor and stability to the financial system; helps keep inflation low and preserves macroeconomic stability.
- Fiscal frameworks:
  - MTFF status: early stage; establishment of a fiscal forecasting unit (FFU) and requests for five-year consolidation plans by line ministries.
  - Recommended sequencing: MTFF first (projections of fiscal balance, non-O&G balance, aggregate revenue and spending), then MTBF to provide medium-term spending guidelines.
  - Critical prerequisites: credible annual budget with realistic hydrocarbon price/production assumptions; enhanced MOFE forecasting capacity; multi-year fiscal risk management; consolidated top-down budget process; capacity building.
  - Public financial management reforms: consolidated monitoring of budgetary/extrabudgetary resources; advance operation of a treasury single account (TSA).
  - Fiscal rules: recommend a procedural fiscal rule (principles, targets, fiscal strategy statement content, reporting arrangements, escape clause) rather than a strict numerical rule given volatile O&G revenues.

### Data and IMF relations (selected)
- Assessment of data adequacy: Category B (broadly adequate for surveillance).
- National accounts: quarterly GDP available with a one-period lag; new GDP estimates rebased to 2010 released in 2015; work on Supply and Use Table underway.
- Price statistics: monthly CPI available with a one-period lag; CPI weights from 2015/16 Household Expenditure Survey.
- Labor statistics: Labor Force Survey conducted annually after 2014 survey and 2016 inter-censal update; wages data limited.
- Government finance statistics: shortcomings in classification and consolidation; recommendation to update GFS cash flow statement quarterly and expand coverage to general government.
- Monetary statistics: AMBD reports monthly monetary data to STA; data comprehensive and timely.
- Balance of payments: quarterly BOP in BPM6 since end-2015; net errors and omissions remain large; DI assets not fully captured.
- Technical Assistance and relations:
  - Multiple past IMF TA missions across FAD, MFD, MCM, STA, including Fuel Subsidy Reform (April 2016), Financial Sector development, and e-GDDS (June 2019).
  - Brunei is on the 12-month Article IV consultation cycle; Executive Board concluded the 2018 Article IV consultation on September 17, 2018.

*Source: IMF staff report excerpt for Brunei Darussalam (content unit: 1.  Real and Fiscal Indicators).*

### 1.  Real and Fiscal Indicators ____________________________________________________________________ 16

### 1.  Real and Fiscal Indicators ____________________________________________________________________ 16

### Context
- Brunei’s economy has been adjusting to declining oil production since 2010 and lower oil and gas (O&G) prices since 2014, with wide-ranging reforms launched in 2015 aimed at:
  - (i) ensuring long-term fiscal sustainability and intergenerational equity, and
  - (ii) fostering economic diversification by improving the business climate, developing the financial sector, attracting FDI in priority business clusters, and supporting micro, small and medium-sized enterprises (MSMEs).
- In 2018 the O&G sector accounted for:
  - 58 percent of GDP,
  - 81 percent of government revenues, and
  - 95 percent of exports.
- Sizable sovereign wealth buffers, virtually no public debt, and ample international reserves underpin resilience and provide scope for gradual adjustment.
- Progress on reforms has been broadly in line with Fund advice, but progress on non-O&G revenue measures, energy subsidy reforms, and improvements in data compilation and dissemination could be accelerated.

### Recent developments, outlook, and risks
Findings and recent data:
- Growth and production:
  - Growth in 2018 slowed to 0.1 percent, due to unscheduled maintenance of O&G fields.
  - Non-O&G sector grew 2.5 percent year-on-year in Q1 2019.
  - Overall growth declined to -0.5 percent in Q1 2019 due to scheduled maintenance of O&G fields.
- Inflation:
  - Average inflation in 2018: 0.1 percent.
  - Inflation in May 2019: -0.2 percent.
- Unemployment (Appendix III):
  - Unemployment rate increased to 9.3 percent in 2017 from 6.9 percent in 2014.
  - Youth unemployment rate increased to 28.9 percent from 25.3 percent.
  - Unemployment rate of locals: 11.5 percent in 2017.
  - Youth unemployment rate of locals: 31.7 percent in 2017.
  - Female labor force participation rate declined to 56.5 percent.
- Fiscal consolidation and balances (Text Table 1, fiscal year April–March, millions of BND and percent of GDP):
  - Revenue: 34.4 (2014/15), 21.7 (2015/16), 22.5 (2016/17), 22.7 (2017/18), 32.6 (2018/19).
    - Oil & Gas: 29.4, 15.9, 13.4, 16.2, 25.1.
    - Non-Oil & Gas: 5.0, 5.9, 9.2, 6.5, 7.4.
  - Expenditure: 35.4, 37.1, 39.3, 35.6, 32.3.
    - Current: 26.6, 29.2, 31.2, 30.4, 29.6.
    - Capital: 8.8, 8.0, 8.1, 5.2, 2.7.
  - Overall Balance: 2/-1.0, -15.4, -16.8, -12.9, 0.3.
  - Non-O&G Balance (% of Non-O&G GDP): -70.5, -65.1, -59.6, -61.3, -54.9.
  - Nominal GDP (millions BND): 20,581 (2014/15), 17,063 (2015/16), 15,905 (2016/17), 17,048 (2017/18), 18,440 (2018/19).
  - Nominal non-O&G GDP (millions BND): 7,735, 7,600, 7,449, 7,508, 7,636.
- External sector:
  - Current account surplus narrowed to 7.9 percent of GDP in 2018.
  - The surplus is expected to rebound on current policies as downstream exports rise and temporary imports fade.
- Exchange rate and reserves:
  - The peg to the Singapore dollar remains appropriate and is assessed to help keep inflation low and preserve macroeconomic stability.
  - Official reserves assessed to remain above adequacy benchmarks.
- Banking sector:
  - Capital adequacy ratio increased from 18.6 percent in 2018Q1 to 20.7 percent in 2019Q1 (regulatory minimum 10 percent).
  - Overall liquid asset ratio hovering around 50 percent.
  - Gross non-performing loans and financing ratio: 5.1 percent.
  - Return on assets increased to 1.5 percent from 1.2 percent.
  - Return on equity increased to 10.4 percent from 8.6 percent.
  - Private sector credit recovered from -3.9 percent to -3.0 percent.
  - Total banking sector loans increased from -2.0 percent to 5.4 percent (includes loans to government-linked companies (GLCs)).

Outlook:
- Growth projections:
  - Growth projected to accelerate to 1.8 percent in 2019, reflecting stronger O&G activities and planned investment.
  - Medium-term improvement expected from start of operations of Hengyi refinery and Brunei Fertilizer Industries and stronger O&G activities from 2020 onward.
- Fiscal path:
  - Fiscal position would deteriorate in 2019 owing to lower O&G prices and higher capital spending, but expected to recover in the medium term.
- Inflation:
  - Expected to remain low, but positive, over the medium term.
- Current account:
  - Expected to increase as exports of O&G and downstream products strengthen and temporary imports fade.
- Credit:
  - Private sector credit growth expected to recover in line with non-O&G growth.

Risks:
- Near-term risks tilted to the downside (Appendix I):
  - Lower-than-expected energy prices.
  - Disruption in domestic O&G production from aging fields.
  - Lower-than-expected production from new projects.
  - Delays in large downstream FDI projects.
  - A sharp tightening of global financial conditions and rising protectionism.
- Upside risks:
  - Geopolitical tensions pushing O&G prices higher.
  - Asset rejuvenation and planned exploration delivering higher-than-expected O&G production.
- Adverse scenario illustration:
  - Staff assumes medium-term O&G prices fall back to the lowest levels observed in 2016 (oil price at US$34.4 and gas price at US$6.4) and remain there.
  - In this low probability scenario, the fiscal deficit is projected to be lower by about 10 percentage points over 2019-2024 compared to the baseline, requiring use of sovereign asset funds and undermining intergenerational equity.

Authorities’ views:
- Authorities broadly agreed with recent developments assessment but are more optimistic on short-to-medium-term outlook due to upstream investment and scheduled asset rejuvenation.
- Hengyi refinery may start operations this year, potentially boosting O&G and non-O&G activity.
- Authorities are implementing active labor market programs, including Bruneianization, to reduce unemployment.

### Macroeconomic policies
A. Continuing Fiscal Consolidation and Reducing the Procyclicality of Fiscal Policy
Findings and policy actions:
- FY2019/20 budget formulated on more realistic expenditure assumptions, noting that recent years’ spending outturns averaged about 10 percent higher than budgeted.
- Medium-term fiscal consolidation program introduced to help each ministry formulate consolidation plans and rebalance the budget toward growth-promoting activities.
- Consolidation initiatives include corporatization and privatization, public-private partnerships, evaluation of subsidies, fiscal management enhancement, revenue diversification, and amalgamation of the government’s asset management system.
- Staff view: support for consolidation but calls for more ambition to ensure long-term sustainability and move closer to intergenerational equity.
  - Estimated gap between non-O&G balance and level consistent with intergenerational equity: about 10 percent of non-O&G GDP in 2024.
  - Brunei’s fiscal buffers and no public debt provide space for gradual adjustment.

Staff recommendations for medium-term reforms:
- Continue reforming public services and the wage bill:
  - Foster public sector productivity and incentivize Bruneians toward private sector jobs.
  - Contain wage bill by streamlining civil service vacancies.
- Reform fuel subsidies in line with IMF technical assistance (TA):
  - TA estimates fiscal cost of fuel subsidies at 1-1.5 percent of GDP.
  - Subsidies encourage excessive consumption and inefficient capital allocation and benefit wealthier groups more than the vulnerable.
  - Recommend comprehensive reform strategy with clear communication and compensatory measures to protect the vulnerable.
- Rebalance budget spending toward growth-enhancing activities:
  - Reduce untargeted subsidies (e.g., housing and food).
  - Promote more efficient energy and water use.
  - Prioritize spending on physical infrastructure (public transportation), human capital (education and training), institutional frameworks, MSME support, active labor market programs, and digitalization.
- Increase non-O&G revenue:
  - Recalibrate property taxes, expand excise taxes, and adopt a Goods and Services Tax (GST).

Scenario impacts and fiscal frameworks:
- Adjustment scenario (gradual reform of fuel subsidies and lower wage bill) would lead to an additional reduction in the deficit path by 1.4 percent of GDP on average annually relative to the baseline (Text Table 2).
  - This would reduce the gap between the non-O&G balance and the intergenerational equity-consistent level to 7 percent of non-O&G GDP in 2024.
  - Achieve sustainable long-term non-O&G deficit level in 10 years instead of 15 under the baseline.
- Text Table 2 (calendar year basis, percent of GDP, cumulative 2019-2024):
  - Fiscal balance under Baseline scenario: -11.5 (2019), -11.3 (2020), -11.1 (2021), -10.5 (2022), -9.4 (2023), -8.0 (2024), cumulative -61.9.
  - Policy adjustments1/: -11.5 (2019), -10.7 (2020), -10.1 (2021), -9.1 (2022), -8.0 (2023), -6.6 (2024), cumulative -55.9.
    - 1/ Policy adjustments relative to the baseline: containing wage bill (0.2 percent of GDP) and fuel subsidy reform (1.2 percent of GDP) gradually from 2020 to 2022, and sustained in the medium term.
- Recommendation to adopt a formal medium-term fiscal framework (MTFF):
  - MTFF should include aggregate and sectoral ceilings and fiscal risk analysis.
  - Incorporate MTFF into a fiscal strategy with strategic prioritization of expenditure.
  - Strengthen fiscal transparency by publishing detailed budget execution data and reconciling projections with outcomes.
  - Implement a treasury single account and a financial management information system to enhance budget control and monitoring.
- Digitalization recommendations:
  - Integrated beneficiary databases to reduce inclusion and exclusion errors in social safety nets.
  - E-procurement and e-invoice procurement system to generate budgetary savings, promote competition, increase transparency, and reduce corruption vulnerabilities.
  - Support creation of a National Centralized Database for welfare assistance, with emphasis on privacy and cyber security.

Authorities’ views on fiscal reforms:
- Agreed on need for gradual fiscal consolidation.
- FY2019/20 budget aligns with realistic spending assumptions and does not ease fiscal policy.
- Consolidation to be a "whole of government" approach with ministry-level Policy Review, Sector Reform Plan, and Fiscal Consolidation Plan.
- Further corporatization planned; subsidy reforms to be assessed thoroughly and implemented gradually with protections for vulnerable groups.
- Introducing smart metering for electricity and water to reduce leakages; initiatives to reduce fuel subsidies without affecting vulnerable groups.
- Strengthened monitoring via e-invoice system for procurements.
- Reviewing tax policy and structure, feasibility to broaden tax base, and implementing a medium-term expenditure framework to focus more on the non-oil balance.

B. Structural Reforms to Support Diversification, Inclusive Growth, and Job Creation
- (Content unit ends at the heading; substantive details of section B are beyond this excerpt.)

*Source: IMF staff report excerpt for Brunei Darussalam (content unit: 1.  Real and Fiscal Indicators).*

### 23.      The authorities’ initiatives toward economic diversification are commendable, but

### 23.      The authorities’ initiatives toward economic diversification are commendable, but

### Economic diversification: progress and constraints
- Authorities focus on five priority business clusters to support Wawasan Brunei 2035: Downstream O&G, Food, Tourism, Services, and ICT.
- Constraints:
  - Small size limits economies of scale.
  - Private sector activity remains weak, with a strong preference for public sector employment that limits private sector growth.
- Staff view: initiatives are commendable but challenges remain; continued efforts needed to improve business environment, attract quality FDI, enhance human capital, and reform labor market to foster private sector-led growth and reduce unemployment.

### Business environment and regulatory reform
- Progress:
  - Notable improvement in World Bank Doing Business scores from 2016 to 2019, with strong progress in access to credit and starting a business.
- Remaining weaknesses:
  - Further reforms needed for ease of doing business in registering property and trading across borders.
  - Making the regulatory framework more consultative, transparent and predictable would improve the business environment.
- Policy implication: Better business environment is paramount to support private sector-led growth and reduce unemployment, including youth unemployment.

### FDI attraction and trade facilitation
- Current status:
  - Brunei has attracted sizable FDI in the five business clusters, mainly in the downstream O&G sector.
- Potential enablers:
  - Expansion and modernization of Muara Port and trade agreements (for example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP) may enhance FDI attractiveness and global integration.
- Needed actions:
  - Generate stronger positive spillovers from FDI to the domestic economy, including integrating local MSMEs into supply chains.
  - Improve trade facilitation: advance rulings, information availability, and formalities (for example, promoting more automated process for Customs).
  - Link the National Single Window and the ports’ Equipment Interchange Receipts to further enhance trade facilitation.
- Ongoing reforms: introduction of the common online platform (the National Single Window); progress in advance rulings as part of CPTPP preparation.

### Human capital, labor market, and private sector employment
- Current initiatives:
  - Centers and programs: JobCenter Brunei, I-Ready, and the Center for Capacity Building to foster job opportunities and job matching.
- Recommended reforms:
  - Continue labor market and civil service reforms to encourage Bruneians to create and seek private sector jobs and ensure talent is used productively.
  - Implement incentives for private sector employment: align public and private sector wages and benefits, lower reservation wages by signaling limited government employment, and support entrepreneurship and private sector competitiveness.
  - Target human capital investment to build expertise in the five priority business clusters and focus on sector-wide development while preserving competition.
  - Continue supporting MSME development while holding recipients accountable.
  - Encourage start-ups and established firms to compete internationally to obtain market discipline and performance signals.

### Digitalization as a diversification enabler
- Rationale: Brunei’s young and tech-savvy population makes digitalization a priority cluster.
- Policy focus:
  - Upgrade physical and soft infrastructure and improve education quality.
  - Support innovation and job creation where e-commerce can overcome small market-size constraints.
  - Promote initiatives such as coding bootcamps to tackle youth unemployment.
- Institutional steps noted by authorities: establishment of the Digital Economy Council and the Unified National Networks.

### Financial sector development, stability, and integrity
- Structure and key statistics:
  - Banking sector accounts for 83.3 percent of total financial sector assets, equivalent to about 100 percent of GDP.
  - Islamic banks account for 65.6 percent of banking assets.
  - Banks’ offshore assets represent 53 percent.
  - Total domestic credit provided by the financial sector stands at about 30 percent of GDP, the lowest compared to peers.
- Supported reforms under the Financial Sector Blueprint 2016–25:
  - Broaden investor base, establish a secondary bond market, and develop infrastructure and rules for a stock exchange.
  - Develop Brunei as an international Islamic finance hub in niche areas; progress issuing sukuks at longer maturities to build a yield curve and support private sector development.
  - Introduction of conventional and Sharia-compliant overnight standing facilities to support liquidity management.
  - Implementation of the Bureau Credit Score to improve access to credit, increase transparency in lending, and ensure discipline.
  - Publication of the Digital Payment Roadmap 2019-25 and issuance of a fintech regulatory sandbox.
- Supervision and macroprudential priorities:
  - Implementation of IFRS 9 by financial institutions welcomed.
  - Implementation of all three pillars of Basel II seen as an important milestone.
  - Development of Domestic Systemically Important Banks framework, a top-down stress testing framework, and plans to introduce the Counter-Cyclical Capital Buffer.
  - Need for close monitoring of risks from external shocks given size of offshore assets.
  - Planned publication of first financial stability report encouraged.
  - Need to establish a bank resolution framework and contingency planning for crisis management; a working group has been set up to develop the framework including banks’ recovery plans.
  - Support for progress in strengthening the AML/CFT framework and additional measures for the upcoming mutual evaluation; coordination among agencies underscored.

### Data, dissemination, and capacity building
- Current needs:
  - Address delays in releasing national account and balance of payments data and increase data quality.
  - Strengthen capacity on gross external debt reporting.
- Actions and commitments:
  - Commitment to international data standards and best practices, including adoption of IFRS 9.
  - Plan to publish the National Summary Data Page (NSDP) in line with recent IMF TA on e-GDDS.
  - Authorities plan to request TA from the IMF on balance of payments and national account compilation.
  - Authorities expressed interest in IMF TA and trainings and requested IMF flexibilities on conditions for providing these programs for Brunei Darussalam.

### Staff appraisal and policy recommendations
- Macroeconomic outlook and risks:
  - Brunei’s economy has been adjusting to lower O&G prices since 2014 with wide-ranging reforms.
  - Growth expected to pick up in 2019 with medium-term outlook improving due to pickup in O&G sector and large investment projects.
  - Risks: future oil production and prices remain uncertain.
- Fiscal policy recommendations:
  - Support for authorities’ fiscal consolidation program, but more ambition needed to align fiscal position with intergenerational equity considerations.
  - Over the medium term, staff recommends:
    - (i) continue reforms in public services and the wage bill, including streamlining civil service vacancies,
    - (ii) reform fuel subsidies,
    - (iii) rebalance further budget spending toward growth-enhancing activities,
    - (iv) increase non-O&G revenues.
  - Adopt a formal medium-term fiscal framework to control spending and delink it from O&G revenue fluctuations.
  - Use digitalization to improve public financial management.
- Monetary and external assessment:
  - The peg to the Singapore dollar remains appropriate as a credible nominal anchor and for financial stability.
  - External position assessed to be weaker in 2018 than fundamentals; current account balance expected to rebound over the medium term as new downstream exports rise.
- Overall support:
  - Staff supports authorities’ initiatives for diversification and financial sector development while urging continued reforms, monitoring of offshore exposures, strengthening AML/CFT, and closing data gaps.

*IMF staff summary of chapter content*

### 41.      It is expected that the next Article IV consultation with Brunei Darussalam will be held on the

### 1brnea2019001 - 41. It is expected that the next Article IV consultation with Brunei Darussalam will be held on the standard 12-month cycle.

### Macroeconomic performance and outlook
- Real GDP growth (row as presented): 1/-2.5-0.4-2.5 1.3 0.1 1.8 4.7 3.6 3.5 2.4 2.1
- Oil and gas sector GDP (row as presented): -3.7-0.2-2.8 1.2 -1.1 2.4 3.2 3.3 3.5 2.9 2.6
- Non-oil and gas sector GDP (row as presented): -0.8-0.6-1.9 1.5 1.7 1.0 6.8 4.0 3.6 1.8 1.5
- Oil production ('000 barrels/day): 126 127 121 113 112 115 118 122 126 129 132
- Natural gas output (millions cu. ft./day): 1,170 1,228 1,205 1,234 1,184 1,205 1,246 1,291 1,342 1,382 1,421
- Average Brunei oil price (U.S. dollars per barrel): 104.45 53.94 44.65 59.97 33.26 55.61 59.15 59.85 59.05 59.05 59.3
- Consumer prices (period average, percentage change): -0.2 -0.4 -0.7 -0.2 0.1 0.1 0.2 0.2 0.2 0.2 0.2
- Consumer prices (end of period, percent change): 1.2 -1.0 -1.6 0.0 0.0 0.1 0.2 0.2 0.2 0.2 0.2

Major narrative findings (from figures and text)
- Real GDP growth was lower than expected: recovery in the non-O&G sector was offset by a decline in the O&G sector as both crude oil and LNG production declined despite higher oil prices.
- Inflation rose in 2018 but turned negative again in subsequent periods before stabilizing close to zero.
- Fiscal balance improved significantly, driven by higher O&G prices and compressed government spending.
- The current account surplus narrowed in 2018: higher O&G exports were more than offset by higher imports linked to infrastructure projects.
- The peg to the Singapore dollar resulted in a stable real effective exchange rate.
- Credit growth to the private sector declined; the slowdown in 2018 slowed thereafter, largely due to a rebound in corporate credit growth.
- Banking sector indicators: the banking sector is well capitalized, maintains ample liquidity, non-performing loans remained stable (mainly explained by the housing sector), banks remained profitable, and deposit rates remained broadly unchanged.

### Fiscal and public finance indicators
Key level and ratio indicators:
- Area: 5,765 sq. kilometers
- Population (2018): 442,400
- Nominal GDP per capita (2018): US$30,668
- Nominal GDP (millions of Brunei dollars) (row as presented): 21,664 17,778 15,748 16,747 18,301 16,907 17,281 17,498 17,879 18,213 18,575
- Total revenue (percent of GDP, row as presented): 37.7 24.2 17.7 26.0 28.6 23.9 24.1 23.8 23.6 24.2 24.9
- Oil and gas revenue (percent of GDP, row as presented): 32.9 18.4 12.3 17.4 23.4 17.9 18.1 17.6 17.4 18.0 18.8
- Total expenditure (percent of GDP, row as presented): 34.1 38.7 39.4 36.6 32.2 35.4 35.5 34.9 34.1 33.5 32.9
- Overall balance (percent of GDP, row as presented): 3/ 3.6 -14.5 -21.7 -10.6 -3.6 -11.5 -11.3 -11.1 -10.5 -9.4 -8.0
- Non-oil and gas overall deficit (percent of non-oil and gas GDP, row as presented): -71.5 -68.9 -67.7 -57.1 -58.6 -60.0 -58.2 -55.8 -53.6 -52.5 -51.3

Selected budgetary central government developments (Table 2 highlights)
- Revenue (millions of Brunei dollars), sample years: 7,076 3,709 3,583 3,873 6,006 4,077 4,171 4,178 4,263 4,453 4,616 (2014/15–2024/25 row as presented)
- Expenditure (millions of Brunei dollars), sample years: 7,290 6,339 6,250 6,077 5,951 6,020 6,127 6,111 6,104 6,109 6,106
- Overall balance (millions of Brunei dollars, row as presented): -215 -2,630 -2,667 -2,204 55 -1,944 -1,956 -1,933 -1,842 -1,656 -1,490
- Investment income (millions of Brunei dollars, row as presented): 1,124 1,064 1,125 1,376 1,458 1,220 1,196 1,230 1,232 1,234 1,220
- Balance including investment income (millions of Brunei dollars, row as presented): 909 -1,566 -1,542 -828 1,514 -724 -760 -703 -610 -422 -270

Narrative fiscal findings
- Brunei’s fiscal revenue since 2012 has reflected O&G shocks given its small non-O&G revenue base.
- Brunei has made significant progress in fiscal consolidation.
- Hydrocarbon generating capacity appears modest compared to GCC countries.
- Public education expenditures are in line with peers, while health expenditure lags somewhat.

### External sector and reserves
- Current account balance (in millions of U.S. dollars): 5,459 2,157 1,470 1,985 1,068 1,060 1,539 1,814 2,144 2,452 2,831
- Current account (in percent of GDP): 31.9 16.7 12.9 16.4 7.9 8.5 12.0 13.8 15.9 17.6 19.8
- Exports (millions of U.S. dollars): 11,149 6,127 4,813 5,475 6,470 4,952 7,180 8,098 8,474 8,723 8,868
  - Oil and gas exports (millions of U.S. dollars): 9,604 5,909 4,321 5,021 6,114 4,775 4,801 4,724 4,876 5,015 5,148
- Imports (millions of U.S. dollars): 3,670 3,217 2,659 3,072 4,105 3,347 5,022 5,674 5,710 5,629 5,366
- Gross official reserves (millions of U.S. dollars): 3,471 3,211 3,322 3,300 3,221 3,327 3,435 3,543 3,654 3,764 3,876
- Reserves in months of next year's imports of goods and services: 8.6 9.0 9.2 7.0 8.3 6.3 5.9 6.0 6.2 ... (row as presented)

Narrative external findings
- The current account surplus narrowed in 2018 as higher O&G exports were offset by higher imports linked to infrastructure projects.
- Projections for 2020–24 include an increase in petrochemical exports with the start of operations of the Heng Yi refinery (as noted in balance of payments table footnote).

### Financial sector and monetary indicators
Selected monetary and financial indicators
- Broad money (M2) (percent change, y/y): 0.9 1.5 3.2 -1.8 1.5 -0.4 2.8 3.9 (2012–2019 row as presented)
- Private sector credit (percent change, y/y): 1.8 5.9 1.8 2.6 -6.2 -5.3 -3.1 0.4
- NPL to total loans (percent): 6.8 5.7 5.0 4.6 5.9 4.2 4.8 ...
- Regulatory capital to risk-weighted assets (percent): 20.9 19.4 21.4 21.1 21.5 18.1 18.4 ...
- Central bank external assets (net, millions of Brunei dollars, sample row): 3,632 3,875 3,957 4,141 4,354 4,028 4,012 4,111 4,218
- Broad money (millions of Brunei dollars, sample row): 13,962 14,166 14,623 14,365 14,582 14,518 14,930 15,505 16,016

Narrative financial findings
- The banking sector is well capitalized and liquid.
- Non-performing loans remained broadly stable, mainly explained by the housing sector.
- Banks remained profitable and deposit rates remained broadly unchanged.
- Credit growth to the private sector declined; the decline in credit growth slowed in 2018 mainly due to a rebound in corporate credit growth.

### Socioeconomic and competitiveness findings
- Per capita GDP (U.S. dollars), comparisons: Brunei Darussalam per-capita figures shown alongside peers; noted contraction in recent years reflecting low oil price and production.
- Labor market: labor force participation is low for both males and females compared with regional peers; public sector employs the largest share of the labor force.
- Human capital and social spending: room to increase social spending efficiency for education and healthcare; university enrollment is low, particularly for males.
- Doing business and governance: Brunei has made progress improving the business climate and scores well in areas such as starting a business and getting credit; needs improvement in registering property and trading across borders. Governance indicators show relatively strong performance compared with peers.
- Competitiveness: Brunei stands out in health, technology, and infrastructure, but small market size poses challenges; competitiveness could benefit from improvements in the financial system and business dynamism.

### Key tables and projections (high-level)
- Table 1 provides detailed selected economic and financial indicators for 2014–24, including projections for nominal GDP, sectoral production, prices, fiscal aggregates, monetary aggregates, balance of payments, and reserves.
- Table 2 details budgetary central government developments for fiscal years 2014/15–2024/25 with revenue, expenditure, and balance projections.
- Table 3 provides the balance of payments 2014–24 (BPM6 presentation) with goods, services, primary and secondary income, financial account, and reserves.
- Table 4 shows monetary developments, including central bank and depository corporations surveys and broad money for 2012–20.
- Table 5 reports Financial Soundness Indicators and other vulnerability indicators for 2012–19.

*Source: IMF staff report and statistical tables as presented in the provided content unit.*

### Appendix I. Risk Assessment Matrix 1/

### Appendix I. Risk Assessment Matrix 1/

### Key risks (time horizon; likelihood)
- Disruption in domestic O&G production caused by aging fields and lower than expected production from new projects (short- to medium-term; high).
- Large swings in energy prices (short- to medium-term; medium).
- Higher O&G production stemming from the ongoing O&G asset rejuvenation program (short- to medium-term; low).
- Delays in reforms and FDI project implementation in the non-O&G sector (short- to medium-term; high).
- Weaker-than-expected global growth: idiosyncratic factors in the U.S., Europe, China, and stressed emerging markets feed off each other to result in a synchronized and prolonged growth slowdown (medium term, short- to medium-term, short- to medium-term, short-term; low, high, high, medium).
- Rising protectionism and retreat from multilateralism (short- to medium-term; high).
- Sharp rise in risk premia: an abrupt deterioration in market sentiment (short-term; high).

### Expected impacts (by risk)
- Disruption in domestic O&G production:
  - Fiscal revenues and exports are susceptible to O&G production declines, with potential spillovers to the non-O&G sector.
- Large swings in energy prices:
  - Lower energy prices: This would worsen fiscal and external balances, complicating the fiscal consolidation strategy. In addition, long-term plans to increase O&G production could become commercially unviable. Spillovers to the financial sector could rise, weakening banks’ balance sheets.
  - Higher energy prices: Higher exports and fiscal revenues, with potential spillovers to the non-O&G sector.
  - In the near term, uncertainty surrounding shocks translates to elevated price volatility, complicating economic management and adversely affecting investment in the energy sector. As shocks materialize, they may cause large and persistent price swings.
- Higher O&G production (asset rejuvenation):
  - Higher exports and fiscal revenues, with potential spillovers to the non-O&G sector.
- Delays in reforms and FDI project implementation:
  - Continued delays, particularly in large FDI downstream projects, could further hamper growth in the non-O&G sector and slow down diversification.
- Weaker-than-expected global growth:
  - Weak global demand could further suppress O&G prices, worsening fiscal and external balances. Long-term plans to increase O&G production could become commercially unviable. A significant slowdown of the Chinese economy could also slow down important Chinese FDI inflows coming into Brunei.
- Rising protectionism and retreat from multilateralism:
  - Reduced global and regional policy collaboration with negative consequences for trade, capital and labor flows, sentiment, and domestic and global growth.
- Sharp rise in risk premia:
  - U.S. dollar appreciation if unhedged and higher rates could have valuation losses on sovereign holdings of foreign assets in other currencies.

### Recommended policy responses (by risk)
- Disruption in domestic O&G production:
  - Despite substantial fiscal buffers, further re-prioritize current expenditure, including reforming subsidies, and raising non-O&G revenues to ensure long-term sustainability.
  - To mitigate the social impact of these reforms—notably subsidy reforms—implement targeted mitigation measures and a communication strategy that raises awareness of the benefits.
  - Accelerate diversification initiatives.
- Large swings in energy prices:
  - Keeping the consolidating fiscal trajectory is prudent to rebuild buffers; avoid procyclical fiscal policy.
- Higher O&G production (asset rejuvenation):
  - (No additional specific response listed beyond recognizing positive fiscal and export effects.)
- Delays in reforms and FDI project implementation:
  - Continue investment climate reforms that facilitate project execution.
  - Improve public financial management and ensure the quality of public investment.
- Weaker-than-expected global growth:
  - Despite substantial fiscal buffers, further re-prioritize current expenditure, including reforming subsidies, and raising non-O&G revenues to ensure long-term sustainability.
- Rising protectionism and retreat from multilateralism:
  - Press ahead with international trade liberalization efforts such as the CPTPP to expand markets and continue improving the business environment to attract further investments and diversify the economy.
- Sharp rise in risk premia:
  - Continue to manage sovereign asset holdings prudently, including strategic hedging when appropriate.

*Appendix I. Risk Assessment Matrix 1/*

### 3.      Brunei’s REER remains stable. Although the

### 1brnea2019001 - 3.      Brunei’s REER remains stable. Although the

### Exchange rate and external sector
- Bilateral nominal exchange rate vis-à-vis the US dollar showed some volatility in recent years, but:
  - Trade-weighted NEER and REER have remained stable because main trading partners showed roughly similar pattern against the U.S. dollar.
- Heavy reliance on hydrocarbon exports limits exchange-rate impact on the current account:
  - Hydrocarbon exports account for 95 percent of exports.

### Cross-border capital flows and reserves
- Cross-border capital flows:
  - FDI is expected to continue over the medium term driven by funding for ongoing downstream investment projects.
  - Portfolio investment flows remain relatively subdued given the current size and limited growth of the domestic capital market.
  - Vulnerabilities from global financial shocks arise mainly through Brunei’s asset holdings abroad.
- Official reserves and adequacy:
  - Official reserves held by Autoriti Monetari Brunei Darussalam (AMBD) provide a strong buffer against adverse future shocks and are assessed to be more than adequate by various adequacy benchmarks.
  - Brunei’s international reserves in 2018 amount to 29 percent of broad money and 8.7 months of imports.
  - The level of official reserves was around 180 percent of the Fund’s composite metric in 2018—above the recommended 100–150 percent adequacy range—and are projected to gradually increase over the medium term.
  - Commodity-intensive economies have higher precautionary liquidity needs to cope with more volatile terms of trade shocks.
  - The liquid portion of the Sustainability Fund held by the government could also provide an additional buffer against adverse shocks.

### Exchange-rate arrangement and policy implications
- The peg to the Singapore dollar remains appropriate for Brunei:
  - Provides a credible nominal anchor and stability to the financial system.
  - Both the inflation rate and its volatility have been low in comparison to other commodity exporters, suggesting the peg’s credibility helps anchor inflation and preserve macroeconomic stability.
  - The peg enables Brunei to benefit from Singapore’s deep financial markets to manage large external assets without incurring exchange rate risks.
  - It reduces uncertainty for trade and investment from the region and can help attract FDI to develop the non-O&G sector and human capital, supporting productivity and diversification.

### Fiscal policy: role and challenges
- Fiscal policy is central to preserving macroeconomic and financial stability and supporting economic diversification, but tends to be procyclical due to volatile O&G prices and revenues.
- Authorities have taken steps toward establishing a Medium-Term Fiscal Framework (MTFF), including:
  - Establishment of a fiscal forecasting unit (FFU) to provide MOFE with revenue and expenditure forecasts using short- to medium-term models.
  - Requesting line ministries and departments to prepare a five-year fiscal consolidation plan including structural reforms and policy changes.
- Status and recommendations:
  - The MTFF is still in a very early stage.
  - Given volatile O&G revenue, Brunei would benefit from a fiscal framework centered on a procedural fiscal rule rather than a strict numerical target.

### Medium-Term Budget Framework (MTBF) and prerequisites
- Benefits of MTFF/MTBF:
  - Delink public spending from short-term volatility in oil revenue.
  - Protect priority spending and support fiscal consolidation over the medium term.
  - Improve budget process through greater clarity of policy objectives, predictability, comprehensiveness, and transparency.
- Recommended sequencing:
  - Put an MTFF together with a fiscal strategy in place ahead of a more binding MTBF.
  - First stage: simple MTFF providing projections of fiscal balance, non-O&G balance, and aggregate revenue and spending.
  - Second stage: MTBF to provide guidelines to line ministries for medium-term spending plans.
- Critical prerequisites for a full and effective MTBF:
  - A credible annual budget using realistic hydrocarbon price and production assumptions based on explicit rules.
  - Enhanced MOFE capacity in formulating medium-term macroeconomic forecasts.
  - Multi-year fiscal risk management including sensitivity analysis and contingency reserves.
  - A comprehensive and unified top-down budget process for medium-term planning.
  - Capacity building at ministries and government agencies to enhance budget preparation and quality of spending.
- Public financial management reforms to accompany the MTBF:
  - Consolidated monitoring and control of budgetary and extrabudgetary resources.
  - Advancing the operation of a treasury single account (TSA) to consolidate government cash resources and improve budget control and monitoring.

### Fiscal rules
- Fiscal rules can reinforce a multiyear fiscal framework and provide anchors for medium-term ceilings and projections.
- Commodity exporters should modify standard fiscal rules to reflect commodity price volatility, e.g., non-resource balance rules or structural balance rules.
- Given volatile O&G revenues, recommendation:
  - Adopt a procedural fiscal rule including:
    - (i) principles for fiscal policymaking;
    - (ii) requirement for government to set a target for one or more fiscal indicators;
    - (iii) content of the fiscal strategy statement in which those targets are set;
    - (iv) arrangements for reporting performance against those targets;
    - (v) an escape clause for exceptional circumstances.
  - A procedural rule allows flexibility to change quantitative fiscal targets within a principle-based framework.

### Financial deepening and economic diversification
- Financial system characteristics and performance:
  - Brunei’s financial system remains bank dominated; credit to GDP was below 40 percent during 2000 to 2017.
  - No stock exchange, secondary capital and bond market, or private sector sukuk market.
  - Brunei’s FD Index improved during the last decade but remains below ASEAN and GCC countries.
  - For financial institutions category: Brunei’s financial depth and efficiency are at peers’ level; access to financial institutions is significantly higher than peers due to relatively high number of bank branches and ATMs.
  - For financial markets category: depth and efficiency are lower than peers owing to minimal activity in the capital market and private sector bond issuance.
- IMF FD index and empirical findings:
  - The IMF’s FD index captures financial institutions (FI) and markets (FM) across depth, access, and efficiency dimensions.
  - Empirical analysis indicates a significant bell-shaped relationship between financial development and economic growth: financial development increases growth up to a point, after which effects weaken and can become negative.
  - Optimal ranges identified:
    - FD index: between 0.45 and 0.7 (depth components) supports growth.
    - Market index: between 0.4 and 0.6 supports growth.
  - Brunei is below the optimum index value for both development and market index, suggesting further development would support growth.
- Policy recommendations for financial sector development:
  - Continue implementation of Financial Sector Blueprint (2016-25) along with other financial deepening measures.
  - Promote non-bank financial sector development to reduce dependency on banks for long-term financing and mitigate duration mismatch vulnerabilities.
  - Develop capital market infrastructure and instruments:
    - Develop efficient interbank money market and secondary bond market.
    - Establish a market benchmark for risk free interest rate.
    - Improve primary market issuance framework for corporate bond.
    - Develop derivatives market.
  - These measures aim to support further economic development and diversification.

*International Monetary Fund — Brunei Darussalam country report content unit 1brnea2019001*

### chapter 12, pages 865-934 Elsevier.

### BRUNEI DARUSSALAM — STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

### FUND RELATIONS
- Membership Status: Joined October 10, 1995; Article VIII
- General Resources Account (SDR Millions; Percent of Quota)
  - Quota 301.30 100.00
  - Fund holdings of currency (exchange rate) 266.31 88.39
  - Reserve position in Fund 35.20 11.68
- SDR Department (SDR Millions; Percent of Allocation)
  - Net cumulative allocation 203.50 100.00
  - Holdings 217.26 106.76
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None
- Projected Obligations to Fund: None
- Implementation of HIPC Initiative: Not applicable
- Safeguards Assessments: Not applicable
- Exchange Arrangements:
  - Brunei Darussalam’s exchange rate regime is a currency board arrangement, with the Brunei dollar exchanged at par with the Singapore dollar.
  - Brunei has accepted the obligations under Article VIII, Sections 2(a), 3 and 4, and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.
- Article IV Consultation:
  - Brunei is on the 12-month consultation cycle.
  - The Executive Board concluded the 2018 Article IV consultation on September 17, 2018.
- FSAP Participation: Not applicable

- Technical Assistance (selected missions and topics)
  - FAD: A Medium-Term Strategy for Fiscal Sustainability (June 1998)
  - FAD: Public Financial Management (December 2006, June 2011, April 2014)
  - FAD: Fuel Subsidy Reform (April 2016)
  - MFD: Developing the Financial System of Brunei Darussalam (December 1997)
  - MCM/MFD: Establishment of Brunei Darussalam Monetary Authority (January 2006, December 2006, August 2008)
  - MCM: Payment and Settlement Systems/Liquid Payment and Settlement Systems (May 2012), Liquidity Monitoring (January 2015), Monetary and Financial Statistical (March 2015), Scoping mission on the systemic risk monitoring and macroprudential policy frameworks (April 2018), Framework for bank resolution and crisis management (April 2018)
  - STA: Monetary and Financial Statistics (October 1998, January 2006, July-August 2008, October 2009, July 2010, November 2011)
  - STA: Balance of Payments Statistics (May 1996, June-July 2003, June 2004)
  - STA: Government Finance Statistics (October 2011, May 2017)
  - STA: Enhanced General Data Dissemination System (June 2019)

### STATISTICAL ISSUES
- Assessment of Data Adequacy for Surveillance:
  - General: Data provision continues to improve and is broadly adequate for surveillance (Category B).
  - Introduction in 2015 by the Department of Statistics (DOS) of an Advance Release Calendar (ARC) in line with international standards for national statistic releases.
  - DOS started submitting data through the IMF Integrated Correspondence System to the IMF Statistics Department (STA).
  - In 2015, the Department of Economic Planning and Development (DEPD) launched its new website (http://www.depd.gov.bn/) with the latest national statistics.
  - DOS is working to provide data through links such as www.data.gov.bn/ and social media like www.instagram.com/statistics.jpke/.
  - The National Statistics Committee is working to strengthen data collection and compilation processes across relevant agencies.
  - Recommendation: Use of the IMF’s Data Quality Assessment Framework for all national statistics is recommended.

- National accounts:
  - Quarterly GDP is available with a one-period lag.
  - New GDP estimates rebased to 2010 were released in 2015.
  - New series incorporate data from the 2010/11 Household Expenditure Survey, the 2011 Population and Housing Census, and the 2011 Economic Census.
  - Coverage of the government sector was extended to include statutory bodies.
  - GDP by Income Approach as well as Gross National Income and Savings are also released.
  - Work has started for the compilation of the Supply and Use Table, which will incorporate data from the 2015/16 Household Expenditure Survey, the 2016 Population and Housing Census Update, and the 2016 Economic Census.

- Price statistics:
  - Monthly CPI is available with a one-period lag.
  - The CPI weights were derived from the results of the 2015/16 Household Expenditure Survey.
  - Compilation of producer and construction material price indices remains in the plans.
  - Feasibility of compiling import and export price indices is being assessed.

- Labor statistics:
  - DEPD has improved employment statistics and now provides some data on a monthly basis.
  - The 2014 Labor Force Survey was designed and implemented with technical assistance from the International Labor Organization using the latest international standards.
  - An inter-censal update was conducted in 2016 to update the housing and household frame; the Labor Force Survey is now conducted annually.
  - Data on wages are limited; scope remains to enhance data quality.

- Government finance statistics:
  - Shortcomings mainly in classification of some flows and in consolidation of major government institutional units.
  - Deficiencies: recording taxes net of subsidies; omission of key fiscal flows (e.g., property income on assets), unrecorded subsidy schemes, and some capital transfers to extra-budgetary institutions.
  - Priority: ensure that the GFS cash flow statement for the budgetary central government is updated quarterly.
  - Data sources from the Treasury Accounting Financial Information System are continuously monitored and enhanced.
  - Coverage could be expanded to general government by consolidating financial accounts for the budgetary central government, extra-budgetary units, and social security funds.
  - Government finance statistics are not reported for publication in either the Government Finance Statistics Yearbook or the International Financial Statistics.
  - Authorities are committed to improving capacity to compile GFS, including participating in IMF training courses on GFS.

- Monetary statistics:
  - Autoriti Monetari Brunei Darussalam (AMBD) compiles and reports to STA monthly monetary data for the central bank, other depository corporations (ODCs), and other financial corporations (OFCs) using the standardized report forms (SRFs).
  - Data are comprehensive and reported on a regular and timely basis.
  - AMBD is working to further improve data compilation and reduce dissemination lags.

- Financial sector surveillance:
  - AMBD reports quarterly the financial soundness indicators (FSIs) to the Fund, published on the IMF’s FSI website.
  - Reported FSIs comprise all the core (12) and 10 encouraged FSIs for deposit takers.

- Balance of payments:
  - Quarterly balance of payments statistics have been reported to STA in BPM6 format since the end of 2015, with both quarterly and annual data available from 2008.
  - There is a break in the data series due to changes in compilation techniques and methodology.
  - Coverage of other investment has been significantly improved by using data from monetary statistics.
  - Net errors and omissions remain large.
  - Imports of goods coverage have shortcomings; counterpart data on imports of goods showed large discrepancy.
  - Work is underway to improve services data.
  - Direct investment (DI) survey assisted in better capturing liabilities of direct investment enterprises; DI assets remain not captured.
  - Compilation of international investment position in BPM6 basis has finished but not released.

- Data Standards and Quality:
  - Participant in the e-GDDS.
  - An e-GDDS mission took place in June 2019.

### TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE (As of July 2019)
- Date of Latest Observation / Date Received / Frequency of Data / Frequency of Reporting / Frequency of Publication
  - Exchange rates 6/19 6/19 D M D
  - International reserve assets and reserve liabilities of the Monetary Authorities1 06/19 06/19 M M Q
  - Reserve/base money 3/19 4/19 M M Q
  - Broad money 3/19 4/19 M M Q
  - Central bank balance sheet 3/19 4/19 M M Q
  - Consolidated balance sheet of the banking system 03/19 05/19 M M Q
  - Interest rates2 3/19 4/19 D M D
  - Consumer price index 6/19 8/19 M M M
  - Revenue, expenditure, balance and composition of financing3 – general government4 Q4/FY2018/19 6/19 Q I A
  - Revenue, expenditure, balance and composition of financing3 – budgetary central government Q4/FY2018/19 6/19 Q I A
  - Stocks of central government and central government-guaranteed debt5 Q4/FY2018/19 6/19 M M M
  - External current account balance Q1/2019 6/19 Q A A
  - Exports and imports of goods 4/19 7/19 M M M
  - GDP/GNP Q1/2019 7/19 Q Q Q
  - Gross external debt6 NA NA NA NA NA
  - International investment position7 2018 6/19 A I NA

- Footnotes (as presented)
  - 1 Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short‐term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.
  - 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - 3 Foreign, domestic bank, and domestic nonbank financing. Central government data are on FY basis.
  - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
  - 5 Including currency and maturity composition.
  - 6 No reported external debt.
  - 7 Includes external gross financial asset and liability positions vis-à-vis nonresidents.
  - 8 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Semi-annually (S), Annually (A), Irregular (I); Not Available (NA).

*Prepared by the Asia and Pacific Department — August 26, 2019.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1brnea2019001.pdf_