## 3.4 National Development Plans and Economic Diversifications

Economic diversification has been a focus of Brunei's NDPs. Specifically, it was one of the pillars in the Ninth NDP (2007–2012), the first five-year plan of the 30-year long-term development plan. This plan aims to achieve Wawasan Brunei 2035 for Brunei to become a dynamic and sustainable economy, provide a high quality of life for its people and produce a well-educated and highly skilled workforce. In the Ninth NDP, the government placed a strong emphasis on economic diversification, knowledge-based economy and human resources as vital trusts. These emphases were further enhanced under the Tenth NDP (2012–2017). Goals were put forward to enhance economic productivities and provide a more conducive business environment, in addition to improving quality of life through comprehensive health care and medical services, access to a clean and healthy environment and access to necessities. The most recent Eleventh NPD (2018–2023) continued to emphasise strengthening the non-oil and gas sector by focusing on improving the private sector's dynamism and developing the workforce and human capital (DEPS 2020b).

Furthermore, an Economic Blueprint issued by the Ministry of Finance and Economy laid out specific and detailed strategies to promote economic diversification (MoFE 2020). This may indeed be the most important goal to achieve Wawasan Brunei 2035's economic dimension of becoming a dynamic and sustainable economy, in the context of heavy dependence on the oil and gas sector. While standard policy advice for resource-rich economies centres on short-run fiscal stabilisation, which is achieved through diligent fiscal rules and sovereign wealth funds, recent research argues that economic diversification 'is the best way to achieve macroeconomic stability in the long run, to sustainably escape the devastating effects of commodity price volatility, and to smoothen consumption over time' (Chang and Lebdioui 2020: 1).

In this sense, Brunei has been actively and cautiously striving to transition from a hydrocarbon-based economic structure towards a more diversified economic base. Joerg Beutel (2021: 108) defines economic diversification as 'the diversification of exports and domestic production away from extreme dependence on a single dominant industry or a few natural-resource-based products, as well as towards increased complexity and quality of output'. The conventional reasons are that, besides reducing dependency on volatile oil and gas sectors that correlate with international oil and gas prices, growing the share of the non-resource private economy, especially the export-oriented ones, would benefit small countries in terms of more dynamic and sustained economic growth and employment (Alsharif et al. 2017). Data from Brunei's Department of Economic Planning and Statistics show that there are reductions in the oil and gas sectoral shares from 74.6% of the industrial sector share, 96.5% of the export share and 51.2% of GDP in 2010 to 68.5%, 91.4% and 46.2% in 2019 respectively (DEPS 2020a). This corresponds with the increase in total shares of the non-oil and gas sector from 35.9% in 2010 to 44.3% in 2019 (Fig. 3.7). Furthermore, the private content of the non-oil and gas sector increases
<figure><img src="image_22.png" /><figcaption>**Fig. 3.7** Brunei Darussalam: Resource versus non-resource shares in current GDP, 2010–2019 (%). *Source* DEPS (2020a)</figcaption></figure>

from 21.4% to 28% while that of the public (government) slightly increases from 14.5% to 16.3% during the same period. This suggests that the increase in the share of non-oil and gas is mainly driven by the private sector. The non-oil and gas private sectoral share of GDP has been growing at an average rate of 2.6% since 2010 (MoFE 2020).

Table 3.3 further shows the industrial shares in real gross value added (GVA) in the last 10 years. The bulk of shares in output produced are from the industrial sector, followed by services and agriculture sectors. There is an average reduction of about 10% in the share of the industrial sector in GVA from 2010–2014 to 2015–2019. This reduction appears to be driven by oil and gas mining (−9.5%) and oil and gas-related manufacturing (−7.5%) during the same periods. However, the corresponding increase in the shares of non-oil related manufacturing are small. At the same time, the share of the service sector increased by 9%, mainly in wholesale and retail trade (1.2%), finance (1.7%) and other modest increments in sub-service sectors. Government services also increased by 2.4%. Lastly, the agricultural sector shows a very modest increase to 1.1% in its share in GVA. While this may explain why Brunei imports most of its food, it does raise food security concerns in the long term. However, the agricultural share is expected to pick up speed moving forwards through agricultural projects such as the 500-hectare commercial paddy plantation at the Kandol agricultural development area in Belait district (established in 2019) and the current development of the Brunei Agro Technology Park (BATP), an advanced technology business-oriented site and agricultural research centre to promote products, including for the *halal* industry. All these are in line with earlier points that there is an incremental structural change towards the growing share of the non-resource sector.

Data from the ADB’s input–output table show that the GVA content of domestic final demand has steadily increased from 40% in 2010 to 56% in 2017 (ADB 2018). This may be due to Brunei’s growing market size as its population increases. It
<table><caption>**Table 3.3** Brunei Darussalam: Shares of economic activity in real gross value added (%)</caption><thead><tr><th>DEPS-MoFE classification</th><th>ADB (2018) classification</th><th>2010-2014</th><th>2015-2019</th></tr></thead><tbody><tr><td><strong>Agriculture, forestry and fishery</strong></td><td><strong>Primary sector</strong></td><td><strong>0.7</strong></td><td><strong>1.1</strong></td></tr><tr><td>Vegetables, fruits and other agriculture</td><td>Primary sector</td><td>0.1</td><td>0.2</td></tr><tr><td>Livestock and poultry</td><td>Primary sector</td><td>0.3</td><td>0.4</td></tr><tr><td>Forestry</td><td>Primary sector</td><td>0.1</td><td>0.2</td></tr><tr><td>Fishery</td><td>Primary sector</td><td>0.2</td><td>0.4</td></tr><tr><td><strong>Industry</strong></td><td><strong>-</strong></td><td><strong>69.4</strong></td><td><strong>59.8</strong></td></tr><tr><td>Oil and gas mining</td><td>Primary sector</td><td>50.9</td><td>43.4</td></tr><tr><td>Manufacture of liquefied natural gas and other petroleum and chemical products</td><td>High and medium tech</td><td>15.0</td><td>11.9</td></tr><tr><td>Manufacture of wearing apparel and textiles</td><td>Low tech</td><td>0.1</td><td>0.2</td></tr><tr><td>Manufacture of food and beverage products</td><td>Low tech</td><td>0.1</td><td>0.2</td></tr><tr><td>Other manufacturing</td><td>Low tech</td><td>0.5</td><td>0.8</td></tr><tr><td>Electricity and water</td><td>Utilities/low tech</td><td>0.6</td><td>0.9</td></tr><tr><td>Construction</td><td>Low tech</td><td>2.1</td><td>2.5</td></tr><tr><td><strong>Services</strong></td><td><strong>-</strong></td><td><strong>29.9</strong></td><td><strong>39.1</strong></td></tr><tr><td>Wholesale and retail trade</td><td>Business services</td><td>3.9</td><td>5.1</td></tr><tr><td>Land transport</td><td>Business services</td><td>0.1</td><td>0.1</td></tr><tr><td>Water transport</td><td>Business services</td><td>0.7</td><td>0.9</td></tr><tr><td>Air transport</td><td>Business services</td><td>0.3</td><td>0.3</td></tr><tr><td>Other transport services</td><td>Business services</td><td>0.5</td><td>0.5</td></tr><tr><td>Communication</td><td>Business services</td><td>1.2</td><td>1.5</td></tr><tr><td>Finance</td><td>Business services</td><td>3.8</td><td>5.5</td></tr><tr><td>Real estate and ownership of dwellings</td><td>Business services</td><td>2.9</td><td>3.8</td></tr><tr><td>Hotels</td><td>Business services</td><td>0.1</td><td>0.1</td></tr><tr><td>Restaurants</td><td>Business services</td><td>0.6</td><td>1.0</td></tr><tr><td>Health services</td><td>Public and welfare services</td><td>1.1</td><td>1.5</td></tr><tr><td>Education services</td><td>Public and welfare services</td><td>2.5</td><td>3.5</td></tr><tr><td>Business services</td><td>Business services</td><td>2.0</td><td>2.2</td></tr><tr><td>Domestic services</td><td>Public and welfare services</td><td>0.3</td><td>0.4</td></tr><tr><td>Other private services</td><td>Business services</td><td>0.5</td><td>0.6</td></tr><tr><td>Government services/public administration</td><td>Public and welfare services</td><td>9.6</td><td>12.0</td></tr></tbody></table>

Source DEPS (2020a); ADB (2018)
also corroborates with the corresponding growth in domestic final demand which centres on public and welfare services, business, and primary and low-tech sectors (Fig. 3.8). Interestingly, the foreign final demand share in GVA is mainly concentrated in oil and gas-related products (primary, and high- and medium-tech sectors) (Fig. 3.9). This shows that exported oil and gas-related products constitute Brunei's biggest foreign final demand. We further plot the product concentration index from the United Nations Trade and Development (UNCTAD)—a normalised Herfindahl–Hirschman index of the product concentration of merchandise export or import—that captures the concentration of goods exported and imported for Brunei. The index ranges from 0 to 1, ascending in degree of product concentration. Brunei's exports are considerably concentrated in a few products such as oil and gas, albeit at a lesser degree since 2006, while its imports are sourced from a variety of items such as food, manufacturing goods, machinery and transport equipment (Fig. 3.10). International trade theories dictate that Brunei's high export concentration reflects specialisation in its comparative advantage in oil and gas products. Thus, high export concentration is expected. However, the volatility of the prices in the world market and their transmission to domestic macroeconomic variables are the reasons why export diversification from a few products to more diverse quality products is important. Brunei's economic structure is still dominated by the oil and gas sector and exports, despite slowly increasing its non-resource sectoral shares.

Moreover, though the non-oil and gas private sector is growing its share in the national economy, it is still relatively small (less than 30% of GDP). The Department of Economic Planning and Statistics Annual Census of Enterprises (DEPS 2020a) shows that the oil and gas sector (mining and quarrying and their related downstream manufacturing) employed 10–16% of the labour force in 2015–2017. It is expected that with diversification gaining momentum, the private sector would absorb a larger share of employment and hence reduce unemployment. However, the challenges for

<figure><img src="image_23.png" /><figcaption>**Fig. 3.8** Brunei Darussalam: Sectoral shares of GVA content in domestic final demand, 2010–2017.
*Source ADB (2018)*</figcaption></figure>
<figure><img src="image_24.png" /><figcaption>**Fig. 3.9** Brunei Darussalam: Sectoral shares of GVA content in foreign final demand, 2010–2017.
*Source* ADB (2018)</figcaption></figure>

<figure><img src="image_25.png" /><figcaption>**Fig. 3.10** Brunei Darussalam: Product concentration in exports and imports, 1995–2019. *Source* UNCTAD (2023)</figcaption></figure>

the private sector are that 43.7% of employment is concentrated in only a handful of large firms while the remaining 31.5% and 24.7% are absorbed by medium (16.3%) and micro-small (80.6%) enterprises respectively (Fig. 3.11). Thus, policy directions in the Economic Blueprint aim to encourage entrepreneurship, promote FDI and export-oriented firms, and good governance, among others, to spur ‘productive and vibrant businesses’.

FDI brings in capital and is normally export oriented. More importantly, it has the theoretically celebrated positive knowledge and technological spillover effects on domestic firms and entrepreneurial activities. In particular, the formal and informal forward and backward linkages and labour mobilities between foreign and local firms would potentially spur entrepreneurship. Local people will learn from the success and failure of foreign firms. Though there are empirical debates on the presence of crowding-in (positive spillover) and crowding-out (negative spillover) effects of FDI,
<figure><img src="image_26.png" /><figcaption>**Fig. 3.11** Brunei Darussalam: Private enterprise by business size and employment share, 2015–2017. *Source* DEPS (2020a)</figcaption></figure>

recent accumulated research provides clearer evidence on the crowding-in effects of FDI on domestic entrepreneurship when the absorptive capacities of local economies, such as governance quality and financial development, are considered (Slesman et al. 2021; Munemo 2017). Brunei’s governance quality (GQ)—measured with the International Country Risk Guide—ranges from 73 (2006) to 84 (2016) over 100, and Ly Slesman et al. (2021) estimate, within the panel data context, that at GQ 73, a 1% increase in FDI inflows (as % of GDP) would crowd in Brunei’s domestic firm creations by 0.08 (in shares of newly registered private and formal firms per thousand people of working age). It increases further to 0.09, 0.12 and 0.14 as GQ scores increase from 75 to 80 to 84 (a score Brunei reached in 2016) respectively. Ly Slesman et al.’s (ibid.) findings have important policy implications: Brunei stands to gain larger positive spillover effects from FDI inflows in the form of increased entrepreneurship by attracting more long-term capital inflows and improving its GQ. Thus, Brunei should improve its ease of doing business and corroborate the policy efforts prescribed by the Ministry of Finance and Economy (2020). Brunei’s ease of doing business score shows an increase from 58 (2010) to 70 (2020) and is currently ranked 66 among 190 countries.

In sum, to achieve Wawasan Brunei 2035’s goal of a dynamic and sustainable economy, the government places important emphasis on economic diversification, among other important goals, to transform the economy from a resource-based economy into a vibrant non-resource, private-led economy. Modest progress has been made in increasing the share of the private sector, in line with the long-term goals of the Ministry of Finance and Economy’s (2020) Economic Blueprint. Challenges remain, as pointed out in a study conducted by the consultancy firm Monitor Group as long ago as 2003, which include slow government decision-making, a lack of government transparency, significant bureaucracy, a lack of an entrepreneurial culture and an underdeveloped private sector (Koh 2020). Moving forwards, policy reforms must remove these constraints, especially along policy directions proposed in the Economic Blueprint to further enlarge the share of the private sector, promote
entrepreneurship and increase FDI inflows in the private non-oil and gas sectors. According to the 2003 Monitor Group assessment, the priorities should be in tourism and hospitality, financial services, business services, and transportation and logistics (ibid.).

**3.5 Concluding Remarks**

Endowed with natural resource abundance, Brunei has specialised in oil and gas production and export since the discovery of oil in 1929. This allowed the country to transform its subsoil hydrocarbon into surface wealth and become a high-income country. Empirical analysis on data from 1970 to 2019 shows that, in the short and long run, oil and gas rents promoted economic growth. This evidence is in line with the resource blessing viewpoint. However, due to the volatile nature of oil and gas prices and their non-renewable character, reliance on them to grow the economy indefinitely is not sustainable. To grow sustainably over time, structural transformations must rebalance towards the non-resource private sector that is presumed to be dynamic, job-generating and capable of adapting to changing economic circumstances. Economic diversification is imperative.

The oil and gas rents and growing economy would enable the government to finance the development of non-resource sectors, thus enabling it to diversify the economy. Based on various economic indicators, the overview of Brunei's resource and non-resource economy shows that progress has been made on economic diversification in the last 10 years or so. The non-resource private sector, though small, has grown at an annual rate of 2.6% in the last decade. Entrepreneurship has seen an increase as policy initiatives and institutional reforms are being implemented. The challenge remains, however, in increasing the non-oil and gas sector, including non-resource manufacturing, modern services and agriculture sectors. Specifically, efforts to attract more FDI into the non-resource private sector and promote vibrant and value-added employment-generating SMEs and entrepreneurial culture, skills and activities are crucial to promote non-resource-driven economic growth in the long run.

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**Ly Slesman** (also known as Sulaiman Bin Mohd. Ali) is a Senior Assistant Professor at the Centre for Advanced Research (CARe), Universiti Brunei Darussalam. His research interests cover economic development processes and outcomes involving public and private foreign capital flows, entrepreneurship, financial development, natural resources, conflicts and applied economics. His research works appear in international journals such as *Resources Policy*, *International Business Review*, *Economic Modelling* and *International Journal of Finance and Economics*, among others.

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<figure><img src="image_27.png" /></figure>
<figure><img src="image_28.png" /></figure>

Chapter 4
Demographic Trends, Employment
and Diversification in Brunei
Darussalam: An International
Perspective

Bruno Jetin

**Abstract** This chapter looks at the growing mismatch between the labour force and employment in Brunei Darussalam and the policies that could lead to a better fit. The discussion is conducted from an international perspective to better understand the problems common to countries abundant in natural resources and the specificities of Brunei. Section 4.2 starts with an analysis of the demographic trends which shows that the labour force will peak around 2030 and decline slowly afterwards. Unemployment will get less severe in the long term. However, the total dependency rate will become more acute, which raises the issue of financing the social cost of an ageing population. In Sect. 4.3, we describe the highly segmented job structure that has been shaped by the Bruneian growth regime and the social context it has created. We look at unemployment and underutilisation of the labour force and show that labour market segmentation is one of their root causes. Section 4.4 is dedicated to a second driver of unemployment: the lack of diversification of the economy, despite the long-standing efforts of the Brunei government. We conclude with a discussion of the policies that could be adopted to contribute to better diversification of the economy that turns its small size into the basis for a new sustainable growth regime.

**Keywords** Brunei Darussalam · Demography · Unemployment · Labour market segmentation · Gender · Migrants · Diversification

<footnote>B. Jetin (✉)
Faculty of Law, Politics and Social Sciences, Université Sorbonne Paris Nord, Villetaneuse, France
e-mail: bruno.jetin@univ-paris13.fr</footnote>
## 4.1 Introduction

Brunei Darussalam combines several specificities. It has an area of 5,765 km², a population of 445,400 in 2022 and a gross domestic product (GDP) per capita of USD37,152 in 2022. This places Brunei near the bottom at 163rd out of 202 countries and territories in terms of area, 168th in terms of population and 41st in terms of GDP per capita in current US dollars (DEPS 2021a; World Bank n.d.a). Brunei can be considered a small state, according to the pragmatic definition given by Dag Anckar (2020: 53). A small state has limited political, economic and administrative capacities, and finds itself in the weaker part of international asymmetric relations. Limited does not mean insignificant. Brunei has one of the highest per capita military expenditures in Asia, wields noteworthy diplomatic influence through its role in the Association of Southeast Asian Nations (ASEAN) and boasts a high living standard that ranks second in Southeast Asia after Singapore. However, in economic terms, small states face some disadvantages. Competition tends to be limited and monopolistic or oligopolistic structures play a greater role. Above all, small states cannot expect to follow the classical path to development: a large pool of abundant and underemployed workers in agriculture move to cities where they become industrial and service workers. When labour becomes scarce, wages rise and growth accelerates. Nor can small states take advantage of economies of scale that play a decisive role in manufacturing to lower costs and be competitive. Brunei has not experienced this kind of structural change because of its size and resource abundance, which have propelled its living standard to the level of high-income countries.<fnref n="1" /> Oil and gas have made Brunei prosper since 1929 and have reinforced its specificity. Oil revenues are both a boon and an added difficulty. The oil industry tends spontaneously to dominate the whole economy, encourage the development of low-productivity sectors and discourage innovation in new sectors. The structure of employment becomes distorted in favour of public employment at the expense of the private sector. Only state intervention through sensible public policies can correct these growing distortions and recalibrate the growth trajectory in a new direction, combining innovation, productivity and high qualifications.

This chapter looks at the growing mismatch between the labour force and employment and the policies that could lead to a better fit. Section 4.2 starts with an analysis of demographic trends, which shows that the labour force will peak around 2030 and decline slowly thereafter. Unemployment will get less severe in the long term. However, the total dependency rate will become more acute, raising the issue of financing the social cost of an ageing population. In Sect. 4.3, we describe the highly segmented job structure that has been shaped by the Bruneian growth regime and the social context it has created. We look at unemployment and underutilisation of the labour force and show that labour market segmentation is one of their root causes.

<footnote n="1">¹ In 2020, Brunei's gross national income (GNI) per capita, purchasing power parity (PPP) (constant 2017 international $) was USD64,037, and the average in high-income countries was USD47,844 (World Bank n.d.a).</footnote>
<figure><img src="image_29.png" /><figcaption>**Fig. 4.1** Brunei Darussalam: Total population, 1950–2100. *Source* DESA (2022)</figcaption></figure>

Section 4.4 is dedicated to a second driver of unemployment: the lack of diversification in the economy, despite long-standing efforts by the Brunei government. We conclude with a discussion of the policies that could be adopted to better diversify the Bruneian economy and turn its small size into the basis for a new sustainable growth regime.

## 4.2 Demographic Evolution

According to the United Nations *World population prospects 2022*,<fnref n="2" /> Brunei's population will peak in 2050 at 493,000 and will later decline to 392,000 in 2100, close to its level in 2010 (Fig. 4.1).

This future decline can be explained by the fact that Brunei will have achieved its demographic transition. Around 2050 the crude death rate will exceed the crude birth rate (Fig. 4.2). The number of children per woman has decreased sharply in Brunei

<footnote n="2">² In this section, unless otherwise specified, all statistical data come from the United Nations, Population Division of the Department of Economic and Social Affairs (DESA 2022). Projections are based on the median projected trajectory.</footnote>
<figure><img src="image_30.png" /><figcaption>**Fig. 4.2** Brunei Darussalam: Crude birth rate and crude death rate, 1950–2100. *Source* DESA (2022)</figcaption></figure>

from 6.9 in 1950–1955 to 1.88 in 2005–2010, which is below the reproduction rate. Fertility is even projected to stay slightly below average in high-income countries until the end of the century. According to Norainie Ahmad (2023: 69), in the absence of an official population and family policy from the government, ‘development has indeed functioned as “the best form of contraceptive”’ and is the driving force of the demographic transition. Women participate more actively in the labour force because they can rely on their parents and on employed foreign workers to care for their children and do domestic work. Their share in the labour force has doubled and reached 39% in 2020 from 16.8% in 1971 (DEPS 2022a).

Because of the fast demographic transition, the working-age population (15 years and above) will increase until 2055 and then decline (Fig. 4.3).

Since most Bruneians retire between the ages of 55 and 60, the latter being the mandatory retirement age in the country, we can limit the working-age population to the 15–64 category.<fnref n="3" /> The labour force will start to decline in 2030 and reach around 200,000 in 2100, 100,000 less than the population aged 15 years and above (Fig. 4.3). It will alleviate the pressure to create jobs to some extent if Brunei finds a way to

<footnote n="3">³ In 2019–2020 only 1.5% of workers in Brunei were 65 years old and over. They were mostly employers and self-employed workers (DEPS 2022a: Table 1).</footnote>
<figure><img src="image_31.png" /><figcaption>**Fig. 4.3** Brunei Darussalam: Population and working-age population, 1950–2100. *Source* Author's computation with data from DESA (2022)</figcaption></figure>

adapt to the ageing of its population. Because the median age will double from 20.2 in 1980 to 40.9 in 2040 and then continue to rise at a slower pace, old age dependency will be multiplied by 10, from a trough of 5% in 2000 to 51% in 2060, equal to the child dependency ratio (Fig. 4.4). It is projected to reach 70% in 2100. Of course, the youth dependency ratio will decline sharply from a peak of 169% in 1980 to around 50% in 2040, but then it will remain at that level. In other terms, after 2055, the rise of the old age dependency ratio will not be offset by an equivalent decline in the child dependency ratio.

As a consequence, total dependency will increase from its minimum of 39% in 2015–2020 to exceed 50% in 2045 and 80% by the end of the century, which places Brunei above the average of high-income countries (Fig. 4.5).

These observations show that the coming decades will be critical. Enough jobs must be created for the young generations to maintain unemployment at a low level. These jobs must have high productivity to justify the high salaries needed to maintain the current living standards and to finance, in some ways, the cost of an ageing population (Md Hasnol Alwee and Roslee 2020; Siddiqui 2014). In any case, the decline of the labour force will be slow, and one cannot solely count on demographic evolution to resolve one of the most pressing issues in Brunei: creating enough skilled jobs for an ever more educated young labour force.
<figure><img src="image_32.png" /><figcaption>**Fig. 4.4** Brunei Darussalam: Child and old dependency ratios, 1950–2100. *Source* Author's computation with data from DESA (2022). *Note* Old age dependency is a ratio of the population aged 65 and over per 100 population aged 25–64, expressed in percentage. Youth dependency is a ratio of the population aged 0–24 per 100 population aged 25–64, expressed in percentage</figcaption></figure>

<figure><img src="image_33.png" /><figcaption>**Fig. 4.5** Brunei Darussalam: Total dependency ratio and income level groups, 1950–2100. *Source* Author's computation with data from DESA (2022). *Note* Total dependency is a ratio of the population aged 0–24 plus the population aged 65 and over per 100 population aged 25–64, expressed in percentage</figcaption></figure>
<figure><img src="image_34.png" /><figcaption>**Fig. 4.6** Unemployment rate in selected ASEAN countries, 2000–2022. *Source* Author's computation with data from ILOSTAT (2024a)</figcaption></figure>

**4.3 Unemployment and the Segmentation of the Labour Market**

Currently, Brunei has the highest unemployment rate in ASEAN (Fig. 4.6). It has risen steadily since 2000 and remained around or above 7% since 2010, while it has decreased below 5% in all other ASEAN countries.

The unemployment issue is even worse for young Bruneians. It was constantly above 20% since 2008 and peaked at 31% in 2018, while it decreased or stayed at a lower level in all other ASEAN countries (Fig. 4.7).

Unemployment gives only a partial view of the dimension of the employment problem. It is a good indicator of how many people in the labour force do not have a job, although they are ready to work and looking for a job. In many developing countries, however, the incentive for the unemployed to declare themselves at relevant institutions is weak in the absence of an unemployment allowance.

In the Brunei case, Shamim Ahmad Siddiqui (2012: 407) mentions additional problems, among them the fact that all the unemployed counted at the numerator are Bruneians while the denominator of the labour force includes foreign workers, which undermines the rate of unemployment.<fnref n="4" /> Moreover, the unemployment rate says nothing about the quality of jobs of those employed or why discouragement and various kinds of inequalities lead some people to stay out of the labour force. The

<footnote n="4">⁴ Foreign workers who do not have jobs cannot stay in the country.</footnote>
<figure><img src="image_35.png" /><figcaption>**Fig. 4.7** Unemployment of young people in selected ASEAN countries, 2000–2022. *Source*
Author's computation with data from ILOSTAT (2024a)</figcaption></figure>

International Labour Organisation (ILO) has developed a composite rate of labour underutilisation to remedy this situation.<fnref n="5" /> It includes those who work an insufficient time, the unemployed and the potential labour force who are not in the labour force for different reasons but express an interest in it.

The composite rate of labour underutilisation for ASEAN countries is shown in Table 4.1. This broader indicator confirms that Brunei is by far the ASEAN country with the highest labour underutilisation, greater than members with a lower living standard and far above Singapore which has a higher living standard. With an average of 20.4% in 2017–2019, unmet employment needs in Brunei are around 2.5 times higher than the unemployment rate suggests. Time-related underemployment (38.5%) counts as much as unemployment (38.9%) in the composite rate, and the potential labour force amounts to 22.6%, revealing significant discouragement or job search difficulties.

How can we explain this disappointing employment performance? Two inter-
twined factors contribute to unemployment and labour underutilisation: the highly
segmented nature of employment and the lack of economic diversification, which is
analysed in the next section.

Labour market segmentation is always an institutional, economic, cultural, gender and ethnic construct (Reich et al. 1973; Hudson 2007; Piore 2018). Each country combines a different set of segmentation according to its historical legacy, social norms and values, state intervention and growth pattern. In Brunei, the state has always played a central role in determining the rules and regulations that shape the labour market. The state is also the main employer. Table 4.2 shows the share of

<footnote n="5">⁵ LU4 – Composite measure of labour underutilisation = (time-related underemployment + unemployment + potential labour force) × 100/(labour force + potential labour force).</footnote>
<table><caption>**Table 4.1** Composite labour underutilisation (LU4) in ASEAN, 2017–2019 (%)</caption><thead><tr><th></th><th>2017</th><th>2018</th><th>2019</th><th>Average</th></tr></thead><tbody><tr><td>Brunei Darussalam</td><td>23.2</td><td>19.6</td><td>18.5</td><td>20.4</td></tr><tr><td>Indonesia</td><td>12.6</td><td>13.0</td><td>11.0</td><td>12.2</td></tr><tr><td>Cambodia</td><td>2.2</td><td>2.2</td><td>2.2</td><td>2.2</td></tr><tr><td>Lao PDR</td><td>12.6</td><td>12.5</td><td>12.5</td><td>12.5</td></tr><tr><td>Malaysia</td><td>8.6</td><td>8.2</td><td>8.2</td><td>8.3</td></tr><tr><td>Philippines</td><td>16.8</td><td>16.4</td><td>16.1</td><td>16.5</td></tr><tr><td>Singapore</td><td>9.0</td><td>8.6</td><td>8.1</td><td>8.5</td></tr><tr><td>Thailand</td><td>2.2</td><td>2.1</td><td>1.9</td><td>2.1</td></tr><tr><td>Vietnam</td><td>2.2</td><td>2.1</td><td>1.9</td><td>2.1</td></tr></tbody></table>

Source ILOSTAT (2024a)

public employment in 22 countries whose rents are greater than or equal to 10% of GDP. None of the Southeast Asian countries registers such a high level of rents, and most of the countries that qualify are large oil and gas exporters. Brunei ranks third in public employment despite only being the tenth country in terms of rents. This proves that Brunei redistributes a large share of its rents in the form of public employment, far more than the average for other resource-rich countries.

Brunei has also set up its own brand of ‘Islamic welfare state regime’ (Wood and Gough 2006; Cheung 2017; Yuda 2019). It differs from the East Asian ‘productivist welfare regimes’ based on the Confucian ethical code that tends to attach welfare to work and prioritise economic development (Holliday 2000). Inspired by Islamic welfare ethics, Islamic welfare state regimes emphasise universal and inclusive social policies. According to Tauchid Komara Yuda (2019), the state in Brunei plays a greater role in the Islamic welfare regime than in Malaysia and Indonesia, where civil society also contributes significantly. In Brunei, the welfare state is generous and gives free access to health care and education up to university level, and a universal pension system allows people to retire between the ages of 55 and 60 (Md Hasnol Alwee and Roslee 2020).<fnref n="6" /> Moreover, there is no personal income tax or sales tax. Petrol, electricity, water and some foods are subsidised. This explains how Brunei achieves a very high human development index score.

<footnote n="6">⁶ From 1959 to 1993 civil servants were eligible for the Government Pension Scheme (GPS), which was a very generous non-contributory defined benefit retirement scheme. Civil servants received a maximum amount of three-quarters of their final paid salary, and the mandatory retirement age was 55. The system became too onerous and after 1993 only uniformed civil servants stayed eligible. An Employees Trust Fund (ETF) replaced the GPS. It is a defined contribution retirement that applies to the private sector. Both employees and employers contribute 5% of employees’ monthly salaries to the fund, and employees receive the total amount of their contributions at the end of their working life. The mandatory retirement age was amended to 60 years old in 2010, and a supplemental contributory pension fund was introduced on a voluntary basis. Finally, an old age pension was created in 1959 to provide a ‘minimum living subsistence to all citizens and permanent residents aged 60 and above’ with BND250 monthly. In 2021 it was restricted to Bruneian citizens and stateless permanent residents, while permanent residents with foreign citizenship were excluded.</footnote>
<table><caption>**Table 4.2** High rents and public employment in selected countries</caption><thead><tr><td>Country</td><td>Share of public employment (last year available)</td><td>Total rents, 2010–2019 (% of GDP)</td></tr></thead><tbody><tr><td>Iraq</td><td>38.3</td><td>41.8</td></tr><tr><td>Algeria</td><td>36.9</td><td>21.6</td></tr><tr><td>Brunei Darussalam</td><td>34.1</td><td>22.4</td></tr><tr><td>Saudi Arabia</td><td>30.5</td><td>35.1</td></tr><tr><td>Mongolia</td><td>25.0</td><td>21.0</td></tr><tr><td>Azerbaijan</td><td>23.4</td><td>25.5</td></tr><tr><td>Kazakhstan</td><td>23.3</td><td>18.8</td></tr><tr><td>Timor Leste</td><td>22.8</td><td>57.6</td></tr><tr><td>Venezuela</td><td>20.1</td><td>16.4</td></tr><tr><td>Yemen</td><td>19.4</td><td>10.8</td></tr><tr><td>Kuwait</td><td>18.6</td><td>46.0</td></tr><tr><td>Iran</td><td>15.8</td><td>22.3</td></tr><tr><td>Angola</td><td>14.6</td><td>26.4</td></tr><tr><td>Zambia</td><td>11.9</td><td>12.6</td></tr><tr><td>Oman</td><td>10.5</td><td>34.3</td></tr><tr><td>United Arab Emirates</td><td>10.3</td><td>20.7</td></tr><tr><td>Qatar</td><td>9.3</td><td>27.4</td></tr><tr><td>Congo, Democratic Republic</td><td>8.7</td><td>22.6</td></tr><tr><td>Nigeria</td><td>8.6</td><td>11.4</td></tr><tr><td>Papua New Guinea</td><td>7.5</td><td>12.8</td></tr><tr><td>Mozambique</td><td>4.4</td><td>13.8</td></tr><tr><td>Chad</td><td>3.4</td><td>21.9</td></tr></tbody></table>

Source Author's computation. Rents: World Bank (2024). Public employment: ILOSTAT (2024b)

Getting a government job is the dream of many Bruneians. In addition to the higher salary and guarantee of employment, it makes it possible to obtain a set of material advantages (rent subsidy, low-interest housing, car loans, various allowances) amounting to about 70% of salary (IMF 1999: 8), and, above all, a high social status. Having a government job is a symbol of success. Many young Bruneian graduates prefer to wait until they get a public job (Koh 2020: 53) or else consider it temporary when they work in the private sector to make a living. These traits are not specific to Brunei but are found in all high-rent countries (Hertog 2017). Soon after independence in 1984, the government adopted a 'Bruneisation policy' that gave employment priority to local people to help absorb new graduates into the labour force (Abu Bakar 1989). In the 1990s it was largely achieved in the government, oil and gas, and financial sectors. The problem is that the government cannot provide public sector jobs to all Bruneians because it would not be fiscally sustainable and is not desirable from a long-term growth perspective. In 2014, when Brunei was hit by the fall of oil
prices and unemployment surged, the government created more temporary jobs in the government sector and the state's workforce peaked at around 50,000 in 2015. In 2021 this number was reduced to 46,591 (DEPS 2022a). The scarcity of jobs led the government to adopt a series of measures to increase the share of Bruneians in the private sector. 'In 2014, work permits for the employment of foreigners for the posts of cashier, driver, supervisor, sales clerk, shop staff, butcher and baker were suspended' (Koh 2020: 20). Additional levies were imposed on the recruitment of foreigners in the service sector. In 2018 a new directive imposed hiring a minimum of 90% of Bruneians in the oil and gas sector. In 2019 it was extended to eight non-oil and gas industries (Wardi 2019), and certain government contracts are now reserved for Bruneian Malay contractors (Koh 2020: 20).

These measures were very effective. Up until 2018 more Bruneians were working in the public sector than in the private sector (Fig. 4.8). However, in 2021 the situation changed significantly. Compared to 2014, the public sector lost 21,725 workers because public companies cut jobs drastically during the COVID-19 pandemic. In the same period, the private sector created 44,535 jobs that primarily benefited local people. A closer look reveals that the private sectors that recruited Bruneians the most were wholesale and retail trade (+12,500), professional, technical, administrative and support services (+4,042), manufacturing (+2,196), accommodation and food service activities (+3,319), and agriculture, forestry and fishery (+1,405) (DES 2014; DEPS 2017, 2018, 2019, 2020, 2021a, b).

<figure><img src="image_36.png" /><figcaption>**Fig. 4.8** Brunei Darussalam: Breakdown of local employment in the public and private sector, 2014–2021. *Source* Author's computation with data from DES (2014), DEPS (2014, 2017, 2018, 2019, 2020, 2021a, b)</figcaption></figure>
<figure><img src="image_37.png" /><figcaption>**Fig. 4.9** Brunei Darussalam: Share of foreign workers in selected sectors, 2003–2020 (%). *Source* DEPS (2017, 2018, 2019, 2020, 2021b, 2022a, b)</figcaption></figure>

However, the wage and prestige gap between the public and private sectors remains, and so the appeal is to work for the government. According to our estimations, in 2017–2021, the average salary in the public sector (BND2,237) was 30% higher than the average income for Bruneians for the whole economy (BND1,735).<fnref n="7" /> This must be compared with a median income of around BND1,000 for Bruneians and BND600 for foreign workers.

The segmentation between the public and private sectors is redoubled by a segmentation within the private sector between Bruneian and foreign workers and a division between skilled and unskilled workers among the latter. Private sector companies producing goods and services for the domestic market find it more profitable to recruit foreign workers from neighbouring countries or South Asia because they can pay them much less than local workers. Therefore, most of these companies have specialised in domestic non-tradeable goods, which are both profitable and less risky than export markets. In the industry, accommodation, food service and commerce, the share of foreign workers has declined markedly to below 40%, but they are still the vast majority in the construction sector (Fig. 4.9).

Foreign workers, mostly from South Asian countries, have built most of the infrastructure and buildings in Brunei. Construction relies on unskilled or semi-skilled hard

<footnote n="7">⁷ We divided the government salary bill reported in IMF Annex IV reports by the number of employees in the public sector that we compare with the monthly income for locals reported in the Department of Economic Planning and Statistics *Labour force surveys*. We estimated the average for 2017–2021.</footnote>
manual labour. Most foreign workers still do manual labour, like craft and related trade work, plant and machine operations or elementary occupations that include female domestic workers (Table 4.3). Foreign workers' earnings are very polarised (Table 4.4). While foreign technicians, professionals and managers earn 10–50% more than their local counterparts, the opposite is true for semi- or low-skilled foreign workers. In 2014–2019 the latter earned 20–40% less than a local person for the same occupation.

The wage gap between public and private jobs and between local and non-local occupations in the private sector is an additional difficulty for strengthening a productive private sector and creating highly skilled, well-paid jobs. Private companies are

<table><caption>**Table 4.3** Brunei Darussalam: Share of foreign workers by occupation, 2014–2021 (%)</caption><thead><tr><th>Share of foreign workers</th><th>2014</th><th>2017</th><th>2018</th><th>2019</th><th>2020</th><th>2021</th></tr></thead><tbody><tr><td>Employed population by occupation</td><td>27.5</td><td>25.4</td><td>28.0</td><td>33.5</td><td>28.8</td><td>29.0</td></tr><tr><td>Managers and senior officials</td><td>23.4</td><td>20.7</td><td>22.8</td><td>25.6</td><td>23.1</td><td>18.1</td></tr><tr><td>Professionals</td><td>14.0</td><td>12.2</td><td>13.7</td><td>15.0</td><td>11.2</td><td>11.2</td></tr><tr><td>Technicians and associate professionals</td><td>18.1</td><td>18.4</td><td>14.0</td><td>26.3</td><td>20.1</td><td>19.6</td></tr><tr><td>Clerical support workers</td><td>5.2</td><td>3.9</td><td>1.9</td><td>5.8</td><td>4.9</td><td>7.1</td></tr><tr><td>Service and sales workers</td><td>25.0</td><td>18.6</td><td>22.8</td><td>23.2</td><td>14.8</td><td>13.7</td></tr><tr><td>Skilled agricultural, forestry and fishery workers</td><td>17.8</td><td>22.7</td><td>11.2</td><td>3.2</td><td>32.2</td><td>20.2</td></tr><tr><td>Craft and related trades workers</td><td>61.4</td><td>48.7</td><td>53.8</td><td>66.4</td><td>57.3</td><td>46.9</td></tr><tr><td>Plant and machine operators and assemblers</td><td>33.1</td><td>27.5</td><td>42.1</td><td>37.2</td><td>42.7</td><td>66.8</td></tr><tr><td>Elementary occupations</td><td>56.0</td><td>59.3</td><td>64.3</td><td>72.4</td><td>66.1</td><td>64.2</td></tr></tbody></table>

*Source* Author's computation with data from DES (2014); DEPS (2017, 2018, 2019, 2020, 2021b)

<table><caption>**Table 4.4** Brunei Darussalam: Occupation earning gap: Foreign workers earning/local workers earning, 2014–2019 (%)</caption><thead><tr><th>Occupations</th><th>2014</th><th>2017</th><th>2018</th><th>2019</th><th>2014–2019</th></tr></thead><tbody><tr><td>Managers</td><td>84</td><td>143</td><td>115</td><td>103</td><td>111</td></tr><tr><td>Professionals</td><td>145</td><td>151</td><td>152</td><td>153</td><td>150</td></tr><tr><td>Technicians and associate professionals</td><td>109</td><td>93</td><td>151</td><td>101</td><td>113</td></tr><tr><td>Clerical support workers</td><td>68</td><td>93</td><td>100</td><td>73</td><td>84</td></tr><tr><td>Service and sales workers</td><td>69</td><td>56</td><td>56</td><td>70</td><td>63</td></tr><tr><td>Skilled agricultural, forestry and fishery workers</td><td>111</td><td>56</td><td>86</td><td>50</td><td>76</td></tr><tr><td>Craft and related trades workers</td><td>73</td><td>90</td><td>49</td><td>69</td><td>70</td></tr><tr><td>Plant and machine operators and assemblers</td><td>61</td><td>123</td><td>57</td><td>83</td><td>81</td></tr><tr><td>Elementary occupations</td><td>54</td><td>64</td><td>64</td><td>76</td><td>64</td></tr><tr><td>Total</td><td>68</td><td>75</td><td>69</td><td>70</td><td>71</td></tr></tbody></table>

*Source* Author's computation with data from DES (2014); DEPS (2017, 2018, 2019, 2020, 2021b)
<figure><img src="image_38.png" /><figcaption>**Fig. 4.10** Brunei Darussalam: Employment to population ratio by sex, 1971–2021. *Source* Author's computation with data from DEPS (2022a)</figcaption></figure>

not induced to invest in technology upgrading and training, which are more expensive and riskier than hiring cheap labour. Foreign workers cannot move to another company without the consent of their present employer (Koh 2020: 52), which limits the possibility of market mechanisms leading to higher wages and reducing the wage gap.

Female labour is another segment of the labour market in Brunei. Although the female labour force doubled between 1971 and 2001, it has plateaued in recent years at 50% (Fig. 4.10).<fnref n="8" /> This means that half the female working-age population is not employed, while around 70% of men are employed. Table 4.5 shows that the participation of female workers in employment is at the same level in Malaysia, Indonesia and some Arab Gulf countries, all far below the level reached in Singapore and Thailand.

It remains to be seen whether the increase in female employment observed in 2021 heralds a convergence towards these latter countries or is a temporary effect of COVID-19. Women in Brunei mostly work in the private sector, and this includes foreign women. In the government sector, where nearly 100% of workers are Bruneian, women have been the most numerous since 2011. In 2021 they accounted for 56% of government employees, up from 47% in 2003 (Author's calculations

<footnote n="8">⁸ The employment-to-population ratio is the number of persons employed as a percentage of the total working-age population.</footnote>
<table><caption>**Table 4.5** Employment to population ratio of women, selected countries (2019–2020), except Kuwait (2015–2016) (%)</caption><thead><tr><td>ASEAN</td><td>%</td><td>GCC</td><td>%</td></tr></thead><tbody><tr><td>Brunei</td><td>54.2</td><td>Kuwait</td><td>52.5</td></tr><tr><td>Indonesia</td><td>53.7</td><td>Oman</td><td>34.9</td></tr><tr><td>Malaysia</td><td>53.2</td><td>Qatar</td><td>58.0</td></tr><tr><td>Singapore</td><td>66.5</td><td>Saudi Arabia</td><td>22.0</td></tr><tr><td>Thailand</td><td>66.2</td><td>United Arab Emirates</td><td>57.3</td></tr></tbody></table>

Source ILOSTAT (2024b)

with data from the Public Services Department, Prime Minister's Office). The second sector where Bruneian women dominate is the education sector, where they accounted for 72% of teachers in 2021, followed by human health and social work activities (68%) (DEPS 2021b). In short, Bruneian women are employed mostly by the central government and public services, where they can get promotions and occupy management positions. According to ILOSTAT (2023) data, 32.3% of female workers in Brunei are in senior and middle management positions, which is comparable to the Philippines or Thailand and much higher than Indonesia (19.4%) and the United Arab Emirates (15.7%). In the government sector in 2021, Bruneian women accounted for 41% of heads of departments and sections (division 1), 67% of senior officers (division 2) and 62% of supervisors (level 3).<fnref n="9" /> Working for the government provides stability and opportunities, and is more compatible with family duties. The large presence of foreign female domestic workers (around 9,000 in 2021) also makes it possible for Bruneian women to reconcile a job with family responsibilities (DEPS 2021b).<fnref n="10" />

Foreign female workers represented 22% of female employment in Brunei in 2020 but occupied 65% of low-skill jobs and less than 20% of medium- and high-skill jobs (Fig. 4.11). Bruneian female workers accounted for 78% of female employment and around 85% of medium- and high-skill jobs, but only 35% of low-skill jobs. In 2020, female workers—mostly foreign domestic workers—in elementary occupations earned BND490 per month, which is around 50% of the median income of BND975 for the whole economy that year (DEPS 2020, 2024). This shows how much foreign workers, particularly women, contribute to lowering the labour cost.

National accounts data support the view that the Bruneian growth regime results in a highly profitable corporate sector. As a share of GDP, the net operating surplus (including mixed income) was on average 75% for 2010–2014, 66.7% for 2015–2018 and 65.5% for 2019–2021, when the COVID-19 pandemic hit Brunei’s economy.<fnref n="11" />

<footnote n="9">⁹ There is a total of five levels.</footnote>

<footnote n="10">¹⁰ The ‘Activities of households as employers of domestic personnel’ registers 9,051 females. Among them, there are almost no Bruneian women (DEPS 2021b: 16).</footnote>

<footnote n="11">¹¹ The net operating surplus plus mixed income published in the national accounts of Brunei is, in fact, very close to the concept of gross operating profit because taxes are very small and own account workers are around 5% of employment. The mixed income is therefore marginal and the net operating surplus plus mixed income can be readily compared to the adjusted capital share that</footnote>
<figure><img src="image_39.png" /><figcaption>**Fig. 4.11** Brunei Darussalam: Total female jobs by skill level and nationality, 2020 (%). *Source* Author's computation with data from ILOSTAT (2023), Employment by sex, occupation and citizenship</figcaption></figure>

This capital share places Brunei at the high end of the spectrum.<fnref n="12" /> Tim Callen et al. (2014: 24) report that the Gulf Cooperation Council's (GCC) capital share (gross operating surplus + mixed income) was around 75% in the first half of 2010, the same very high level found in Brunei at the time. The issue is that this high profitability is only realised in the non-tradeable sectors (construction, wholesale and retail trade, accommodation and food services) where productivity is traditionally low. An economy is sustainable when high profits and wages are based on high productivity in the tradeable sectors. This requires a diversification of the economy into new economic activities.

<footnote>can be calculated with the AMECO database (https://economy-finance.ec.europa.eu/economic-resarch-and-databases/economic-databases/ameco-database_en).</footnote>

<footnote n="12">¹² For instance, in the euro area (20 countries), the adjusted capital share is 43.6% (2010–2014), 44.2% (2015–2018) and 43.3% (2019–2021), and for the US it is 43.7% (2010–2014), 43.2% (2015–2018) and 42.4% (2019–2021), based on the author's calculations with the AMECO database.</footnote>
## 4.4 The Quest for Economic Diversification

The second reason for unemployment is the lack of diversification in the economy. The oil and gas industry is a highly capital-intensive industry that does not create many jobs. Downstream oil-related industries, which are basically petrochemical industries, share the same characteristic. Diversifying the economy into more labour-intensive industries and services is therefore necessary to create jobs. The economic literature shows that diversifying the economy is required at the early stage of development when labour is abundant and underutilised. It is only after a rather high-income threshold that economies tend to specialise again in goods for which they are competitive (Imbs and Wacziarg 2003). Dani Rodrik (2005) demonstrates that the most successful countries of the last few decades, such as China, India, South Korea, Malaysia, Hong Kong and Singapore, are those that engaged in producing and then exporting a set of goods that are typical of countries much richer than they were at the time. These high-quality goods are technology intensive. They have boosted productivity which has spread to the rest of the economy with long-lasting positive effects on growth and employment (UNCTAD 2018). This export diversification is not explained by factor endowments and comparative advantages so dear to neoclassical theory but by idiosyncratic elements, most of all, suitable public policies.

Brunei's challenge is of a different nature. It does not belong to the category of low-income countries, which must embark on the diversification journey, but to the category of resource-rich countries with a high income level. Resource-rich countries must diversify their economies to reduce the dependence of their development on natural resources, reduce the volatility of their growth due to the fluctuations in the price of raw commodities, and create employment. They have an advantage because their wealth enables them to finance the diversification process. Nonetheless, they suffer from some specific disadvantages. The higher the dependence, the more the country is exposed to dependence challenges, such as the risks of shock and instability and the difficulty of diversifying to escape the dependence trap (UNCTAD 2021; Nkurunziza 2021).

Among the high-income resource-rich countries, Brunei stands as a unique case. It is the smallest country in terms of population and market size. This means it cannot attract foreign direct investment (FDI) that would come to exploit the local market or use the abundance of cheap labour to export with a competitive advantage like Southeast Asian new industrialised countries did in the past. It must therefore rely on diversified activities related to its expertise in oil and gas, and use its wealth to invest in completely new activities in which it can get a niche in export markets. Nicola D. Coniglio et al. (2021) analyse the specialisation patterns of over 200 countries in 1995–2015 to determine if their specialisation had been characterised by a strong level of path dependence from their initial comparative advantage. They find a large number of new specialisation products that defy their initial comparative advantage. They also conclude that ‘path-dependent new entries in a country’s export basket are associated with a lower growth performance’ and that ‘long jumps are more likely
associated with a high growth rate and are far more common than the academic debate suggests'. In practice, there is no reason to oppose 'comparative-advantage conforming' and 'comparative-advantage defying' specialisation, and Brunei should do both to diversify its economy.

Brunei has recognised the necessity of diversifying the economy since the Second National Development Plan (NDP, 1962–1966), well before its independence in 1984 (CSPS 2024: 35). However, progress has been slow and very recent, and diversification has remained a crucial issue of public policy (Gunn 1993; Siddiqui 2012; see Chaps. 2, 3 and 6 in this volume). One reason is that, along with Saudi Arabia and Kuwait, Brunei consistently counts among the top countries that display both a high level of resource abundance and dependence (Lebdioui 2021: 6).

To illustrate this, we use Amir Lebdioui's (ibid.) data that we have updated to calculate his Multidimensional Indicator of Extractives-based Development (MINDEX). The MINDEX is based on a clear distinction between being resource rich and being resource dependent, and combines six relative and absolute measures on a scale of 0 to 1 that 'reflect the different steps of the resource revenue management policy chain to translate extracted commodities into developmental assets' (ibid.: 6).<fnref n="13" /> Figures 4.12, 4.13 and 4.14 present the Indonesian, Malaysian and Bruneian cases for the years 1997, 2010 and 2016. The two years of low commodity prices were 1997 and 2016, while 2010 registered a sharp increase. The variation in prices illustrates the potential vulnerability of countries dependent on extractive resources.

In per capita terms, Indonesia is not particularly well endowed in extractive resources,<fnref n="14" /> from which it gets low rents (Fig. 4.12). Fortunately, Indonesia is not dependent on minerals, oil and gas. Its scores in export and government revenues do not exceed 0.3 and 0.2 respectively. It is also very small in level per capita. Commodity prices have a clear impact. In 2016 the share of extractives in government revenues fell to a very low level.

Malaysia enjoys much higher resource abundance than Indonesia and gets high rents from its exports (Fig. 4.13). However, Malaysia's economy is not dependent on extractives. Even when commodity prices are high (such as in 2010), its share in exports remains low (0.2 EXP%). Still, price variation has a significant but limited impact on government revenues.

In comparison, Brunei epitomises the case of countries that are both extremely resource rich and dependent on resources (Fig. 4.14). Brunei has very large reserves per capita and manages to get the highest possible rents from them (with a score of 1). The flip side is that 90% of its export revenues are highly dependent on oil and gas (with scores between 0.9 and 1). Their price volatility impacts on government revenues with a score of 0.7 in low-price years (1997 and 2016) and up to 0.9 in

<footnote n="13">¹³ There are four measures of resource abundance (all in constant 2010 USD per capita): (1) extractive exports (EXPPC); (2) extractives rents (RENTS); (3) extractives reserves (RESRV); and (4) government revenues from extractives (REVPC). Two measures of resource dependence are: (1) the share of extractives in government revenues (REV%); and (2) the share of extractives in total exports (EXP%). See Lebdioui (2021) for justification and detail of the methodology and sources.</footnote>

<footnote n="14">¹⁴ Indonesia has a RESRV per capita indicator of 0.3–0.4. This does not mean that Indonesia does not possess high levels of mineral reserves, but that their value has to be shared with a large population.</footnote>
<figure><img src="image_40.png" /><figcaption>**Fig. 4.13** Malaysia
MINDEX, 1997–2010–2016.
*Source* Author's computation
with data from Amir
Lebdioui (2021)</figcaption></figure>

<figure><img src="image_41.png" /></figure>
<figure><img src="image_42.png" /><figcaption>**Fig. 4.14** Brunei
Darussalam MINDEX,
1997–2010–2016. Source
Author's computation with
data from Amir Lebdioui
(2021)</figcaption></figure>

boom years (2010). The good news is that the high revenues Brunei gets from its resources mean that it can fund the needed economic diversification.

To assess progress regarding diversification from an international perspective, a widely used approach is utilised to observe the variety of the export basket. The United Nations Trade and Development (UNCTAD) provides an export diversification index ($S_j$) which is computed by ‘measuring the absolute deviation of the trade structure of a country from world structure’ using the following calculation where $h_{ij} = \text{share of product i in total exports or imports of country or country group j}$, and $h_i = \text{share of product i in total world exports or imports}$:

$$S_j = \frac{\sum_{i}^{n} |h_{ij} - h_i|}{2}$$

The diversification index takes values between 0 and 1. A higher value indicates greater divergence from the world pattern, which is equal to 0.<fnref n="15" />

Brunei's economy is one of the least diversified economies in the world, much less compared to ASEAN, the Organization of the Petroleum Exporting Countries (OPEC) and high-income economies (Fig. 4.15). While ASEAN and OPEC countries' exports have become more diversified in 1995–2021, Brunei's export basket has remained basically the same, with a slight improvement in 2021. Compared to the GCC countries, Brunei shares the same low level of export diversification as Saudi Arabia and Qatar (Fig. 4.16). The diversification of the United Arab Emirates exports

<footnote n="15">¹⁵ This index is a modified Finger–Kreinin measure of similarity in trade. See Finger and Kreinin (1979).</footnote>
shows that there is no fatality for oil-rich countries and that they can successfully diversify their economies.

<figure><img src="image_43.png" /><figcaption>**Fig. 4.15** Export diversification index of Brunei Darussalam and selected regions, 1995–2021.
*Source* Author's computation with data from UNCTAD (2023)</figcaption></figure>

<figure><img src="image_44.png" /><figcaption>**Fig. 4.16** Export diversification index of Brunei Darussalam and the Gulf countries, 1995–2021.
*Source* Author's computation with data from UNCTAD (2023)</figcaption></figure>
## 4.5 Conclusion

The first conclusion of our work is that the slow progress in economic diversification in Brunei cannot be explained by a single factor but by a combination of factors. Clearly, the state of the labour market, the private sector and the limited diversification of the economy are related phenomena. A second conclusion is that the success of diversification requires an overall policy that modifies the structure of incentives and unifies the various measures already adopted to attract foreign investment and local entrepreneurship.

Changing incentives must make working in the private sector as attractive as working in the public sector. For this, the income and benefits in the private sector must be as high as in the public sector. Several proposals have been made in this sense to increase labour mobility and flexibility and close the income gap (Koh 2020: 64–68; Hertog 2017: 6–14). The most innovative proposal addresses citizens’ income: an unconditional cash grant to all citizens that would fill the wage gap between the public and private sector and serve as a basic income security during unemployment. This could be modulated to optimise a set of incentives. For instance, young entrepreneurs could receive a higher citizen income to reward their innovation efforts and secure their projects. This would encourage the creation of innovative small- and medium-sized enterprises (SMEs) in the private sector.

These changes in the labour market could be complemented by a comprehensive research and innovation policy to stimulate endogenous innovation. Developing a national innovation system would establish clear research clusters based on local research capacities in close collaboration with all institutions and entrepreneurs, particularly local SMEs (Jetin 2010). A proposal for implementing the concept of a national innovation system in the Bruneian context has already been made (Amirul et al. 2022). This would help the implementation of the long-term NDP called Wawasan Brunei 2035 (Brunei Vision 2035) that was adopted in 2007 with mixed success (CSPS 2024: 35).<fnref n="16" /> A national innovation system also has the potential to foster other clusters.

One such research cluster would be to make the most of natural resources (apart from oil and gas), such as biodiversity and the existence of unique plant and animal species. By becoming a sanctuary for animal and plant species often endangered in the rest of the world, Brunei could develop a set of innovations in the field of environmental protection, develop medicinal and health applications, and attract foreign investment in the green economy and ecological tourism aimed at quality rather than quantity, like Bhutan does. This has an additional advantage of promoting a positive image of Brunei at the global level and strengthening Brunei’s soft power.

Another research cluster could be energy transition. Several oil and gas-rich countries and oil companies are preparing the net-zero emission target and its impact

<footnote n="16">¹⁶ Wawasan Brunei 2035 has selected the following clusters: energy and downstream activities; high technology and information and communication technology (ICT); tourism and hospitality; agrifood and *halal*; logistics and transport; and business and financial services. Recently, biotechnology, pharmaceuticals and the creative industries have been added.</footnote>
on fossil fuel production and demand by investing heavily in renewable energy. Like other ASEAN member states, Brunei has signed the Paris Agreement and is committed to reaching the target. Brunei could make a virtue of necessity and become a leader in energy transition by investing massively in renewable energies, particularly solar energy, for individual and collective dwellings. There is a whole set of niche markets for producing, storing and delivering decentralised electricity. The use of the electric battery to store energy and develop local electrical circuits is one of the niches that correspond to real needs in Southeast Asia.

Brunei could also make the most of its small size by becoming a leading country in autonomous electric vehicles. The electric car is becoming a mass market in connection with the Paris Agreement and the energy transition (Jetin 2020). Brunei has one of the highest automobile densities in the world, which causes transport congestion and high levels of pollution. At the same time, car traffic is very regular, predictable and much safer than in many countries. These are ideal characteristics to make Brunei a pioneer in the field of autonomous electric vehicles, not only for private cars but also for autonomous low-speed public transport. As for the previous clusters, the activities related to mobility require a strong intensity in research and development, not only in engineering but also in social sciences. This could mobilise the universities of Brunei in partnership with foreign universities and likely attract numerous investments from foreign companies.

Ultimately, Brunei is well positioned to become a place where Southeast Asian students at primary, secondary and tertiary levels can become fluent in English and learn in the region's best international schools and universities. Brunei is obviously much closer to other countries in the region than Australia and New Zealand, not to mention Britain or the United States, and can be a cheaper alternative to Singapore for Asian students who want to learn in an English-speaking environment. English is one of the languages spoken in Brunei and teaching is one of the most preferred occupations of Bruneian female workers. By joining forces with Bruneian universities and the best international schools, Brunei has a vast potential to become a centre of excellence for learning in English in a safe environment. This would create many qualified and well-paid jobs with spillover effects on other services, from food to telecommunications.

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**Bruno Jetin** is currently an Associate Professor at the Faculty of Law, Politics and Social Sciences, Université Sorbonne Paris Nord, France, and he holds a PhD in economics from the same university. He was previously an Associate Professor and former Director of the Institute of Asian Studies, Universiti Brunei Darussalam. His current work focuses on the geopolitics of electric batteries, corruption and foreign direct investment, income distribution and growth in Asia, and the Belt and Road Initiative. His recent publications include: Wage-led demand as a rebalancing strategy for economic growth in China. *Journal of Post Keynesian Economics* 43(3) (2020, with Luis Reyes-Ortiz); Electric batteries and critical materials dependency: A geopolitical analysis of the USA and the European Union. *International Journal of Automotive Technology and Management* 23(4) (2023); and, The effect of corruption on foreign direct investment at the regional level: Positive or negative relationship? In *Corruption and illegality in Asian investment arbitration*, ed. Nobumichi Teramura, Luke Nottage and Bruno Jetin (2024, with Jamel Saadaoui and Haingo Ratiarison).

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<figure><img src="image_45.png" /></figure>
<figure><img src="image_46.png" /></figure>

**Chapter 5**
# Financial Sector Development in Brunei Darussalam: Trends, Prospects and Challenges

Biswa Nath Bhattacharyay

**Abstract** This chapter examines the trends in the financial sector development of Brunei Darussalam during the 2014–2018 period based on 24 indicators measuring depth/intermediation, financial access and financial inclusion and efficiency. It analyses these indicators in comparison with its peers among Association of Southeast Asian Nations (ASEAN) and Gulf Cooperation Council (GCC) countries. It also discusses the major prospects and challenges faced by the financial sector and provides salient policy recommendations. As part of the processes of globalisation and regional integration, the financial sector in Asia has also experienced increased integration and flows of cross-border funds. The financial sector in Brunei is at a developmental stage, though it is institutionally strong with the presence of both Islamic and conventional banks and other financial institutions. Brunei Darussalam Central Bank is slowly working to create a fully functional capital market, a must in order to compete with regional financial markets. Launched in 2016, the Financial Sector Blueprint 2016–2025 provides a roadmap and strategic framework to develop Brunei’s financial services sector into one of Asia’s most competitive and innovative hubs. The successful implementation of the roadmap will help achieve the objectives of Wawasan Brunei 2035 (Brunei Vision 2013), the country’s overarching development strategy, to diversify the economy. The chapter argues that the Regional Comprehensive Economic Partnership (RCEP) agreement will further enhance economic integration and the growth of the region, including the financial sectors of the participating member countries such as Brunei.

<footnote>This paper was written in 2021 and most of the numbers and discussion refer to data and policies relevant to the time period up to that date. Readers may refer to the Brunei Darussalam Central Bank (BDCB) website for the latest information and change of policies, as well as some restructuring of the bank (previously known as Autoriti Monetari Brunei Darussalam, AMBD) that took place in June 2021 (https://www.bdcb.gov.bn/).</footnote>

<footnote>B.N. Bhattacharyay (✉)</footnote>

<footnote>Faculty of Economics and Business, Lambung Mangkurat University, Banjarmasin, Indonesia</footnote>

<footnote>e-mail: dr_biswa@yahoo.com</footnote>
**Keywords** Brunei Darussalam · Brunei Darussalam Central Bank · Regional integration · Financial sector development · Financial technology · Islamic banks · Islamic financial hub

**5.1 Introduction**

During the past three decades many countries in Asia, including Brunei Darussalam, have integrated significantly with major world markets through the formation of more intensive trade and investment linkages. Most Asian economies, particularly those in East Asia, have done so through an economic development strategy based on export orientation and integration into international value chains and production networks. As a consequence, Asian financial sectors have also experienced increased integration and flows of cross-border funds. Though this rapid integration has produced enormous benefits, it has caused economic and financial instability and even crises through contagion effects and instability originating in other regions of the world economy. Coherent and sustainable financial sector development can play a critical role in facilitating the economic growth and welfare of a country. By contrast, financial sector instability or vulnerability can significantly deter growth and cause major disruptions.

Brunei is an open economy with a small geographic area and population and so its financial sector is also modest in size. However, its financial sector is still strong with the presence of Islamic and conventional banks, insurance companies, investment management and advisory companies, and foreign financial institutions. The Islamic bank and trust fund accounted for 65.1% of total assets, 65.6% of deposits and 60.8% of loans/financing in the banking sector in 2019 (AMBD 2019c: 5). This is a distinguishing feature that makes Brunei's banking sector unique in Asia. The banking sector has been going through some significant changes over the past two decades, such as the consolidation of banks since 2005 leading to fewer strong banks and the exit of some international banks. At present, the banking sector is sound and resilient, with high levels of liquidity, sound capital adequacy ratios (CARs) and manageable levels of non-performing loans (NPLs).

Households and businesses are highly dependent on the banking sector for financing, hence this sector accounted for 83.3% of the financial sector's total assets. There is a need to develop a bond or stock market for alternative financing. Brunei is also developing a securities or stock market. This will promote regional integration with other Association of Southeast Asian Nations (ASEAN) and Regional Comprehensive Economic Partnership (RCEP) economies and financial markets, as well as facilitate more local and foreign investment opportunities.

The overall health of Brunei's economy is explained by its robust institutions. The Brunei Currency Board was established on 12 June 1967 for the supervision of the financial sector and management of the Brunei dollar as the new currency replacing the Malaya and British Borneo dollar. On 1 February 2004 the board was dissolved and rechartered under the Brunei Currency and Monetary Board. In 2011 this was
replaced by the Autoriti Monetari Brunei Darussalam (AMBD, Monetary Authority of Brunei Darussalam), which was in turn renamed the Brunei Darussalam Central Bank (BDCB) on 26 June 2021.

Regarding national policies and strategies, in 2016 the AMBD published the Financial Sector Blueprint 2016–2025 (FSBP), a roadmap and strategic framework to develop Brunei’s financial services sector into one of Asia’s most competitive and innovative hubs. The successful implementation of this roadmap will help achieve the objectives of Brunei’s long-term development plan known as Wawasan Brunei 2035 (Brunei Vision 2035), which aims to diversify the economy away from the oil and gas sector by placing greater emphasis on the development of local businesses. The FSBP specifically supports Wawasan Brunei 2035’s third goal of transforming Brunei into a dynamic and sustainable economy that delivers a level of income per capita within the top 10 nations in the world.

In recent years the world economy and financial markets have faced several major risks including: (1) volatile and low oil and gas prices; (2) the trade war between the United States and China; (3) elevated risks for emerging market economies and their financial markets; (4) a disorderly Brexit deal involving Britain and the European Union; (5) the continuous tightening of US interest rates and fall of major international and emerging market currencies against US dollar; (6) a slowdown in global economic growth, particularly in China, Germany and Italy; (7) vulnerability in the European banking sector; and (8) weak global stock markets and continued geopolitical tensions, particularly in the Middle East and Ukraine. These risks have made the global economy and financial markets vulnerable. In addition, in 2020 the world economy was severely affected by the COVID-19 pandemic. As a result, the global economy contracted by 3.4% in 2020, compared to a mere 0.1% decline in 2009 during the global financial crisis. ASEAN economies experienced a contraction of 3.3% in 2020—the first economic contraction in 22 years—compared to the 7.6% expansion in 2009 and average annual growth of 7% in the previous decade (IMF 2020; ERIA 2022). Asian economies and their financial sectors are facing downside risk, particularly increased credit default risk, decreased credit demand and low profitability in the near future.

Concerning trade agreements in Asia, on 14 November 2020 Australia, New Zealand, China, Japan, South Korea and the 10 member states of ASEAN, including Brunei, signed the Regional Comprehensive Economic Partnership (RCEP). On 2 June 2023 the RCEP agreement took effect for all member countries. This agreement is the largest trade bloc in history, covering 2.2 billion people with a combined GDP of USD29.7 trillion (30% of global GDP). It is expected to boost pandemic-weakened economies by reducing tariffs, strengthening supply chains with common rules of origin and codifying new e-commerce rules among others. The major benefits of this agreement include a tariff elimination of at least 92% on traded goods among participating countries, as well as stronger provisions to address non-tariff measures and enhancements in areas which include online consumer and personal information protection, transparency and paperless trading (Heijmans and Nguyen 2020). The RCEP is expected to enhance economic integration and growth, increasing integration among the financial sectors of the participating countries. This will
bring more opportunities and benefits for Brunei's economy and financial sector. The effective implementation of RCEP goals together with ASEAN goals would bring increased financial integration, financial inclusion and financial stability to this region. However, as the financial sectors become more integrated in this region and wider trade bloc, this may create challenges such as increased vulnerability and instability, and the transmission of instability from one member country to another through the contagion effect.

To reap the maximum benefits of the RCEP, the region and its individual member states, including Brunei, need to:

1. Strengthen regional and domestic financial market infrastructure development;

2. Extend cross-border reach and connectivity;

3. Promote interoperability and standardisation;

4. Enhance cybersecurity and data protection;

5. Monitor and conduct macro-prudential surveillance of the economy and financial sector;

6. Extend of distribution channels;

7. Deepen and interlink the financial sector, including the banking sector and capital markets, across the region;

8. Develop cost-effective information and communication technology (ICT) and its infrastructure;

9. Establish strong connectivity in terms of domestic and cross-border infrastructure;

10. Strengthen analytical and compliance capabilities across the region.

In light of these circumstances, it is of utmost importance to examine the trends in Brunei's financial sector development and the emerging prospects and challenges faced by the sector. This chapter mainly focuses on the banking sector as it accounts for a large portion (82.5%) of Brunei's total financial system assets. Section 5.2 examines the role of the financial sector in economic development and financial stability, and summarises findings of the literature on the relationship between financial sector development and economic growth. Section 5.3 discusses policies and strategies for financial sector development in Brunei. Section 5.4 presents the structure of the financial sector of Brunei. Based on 24 indicators, financial sector development in 2014–2018 (as per the availability of data) is analysed in Sect. 5.5 in terms of depth/intermediation, financial access, financial inclusion and efficiency. Section 5.6 shows the major prospects and challenges faced by the banking sector, and provides recommendations to utilise the prospects and address the challenges. The last section provides concluding remarks.
## 5.2 The Role of the Financial Sector in Economic Development and Financial Stability

The major goals of the financial sector, particularly the banking sector, include the promotion of monetary and financial stability and financial access conducive to sustainable economic growth. In this regard, banks play an important role in creating a progressive, efficient and inclusive financial sector. By ensuring continuous financial stability and providing adequate financing to businesses and households through effective, inclusive and efficient financial intermediation, banks can promote economic growth and development. In order to assess the financial stability of a country, there is a need to define financial stability and instability. However, there is no universally accepted definition of what constitutes financial vulnerability or stress. Financial stress occurs when the financial sector is under strain and its ability to intermediate may be impaired. The stress is usually associated with internal and external imbalances, and characterised by:

1. Large shifts in asset prices, such as some financial institutions or assets suddenly losing a large part of their value;

2. An abrupt increase in financial risk/uncertainty;

3. Abrupt shifts in liquidity situation, such as increased liquidity risk;

4. Sudden weakness in the health of the banking system or in major banks, such as increased credit risks and capital adequacy risk. (Bhattacharyay 2009)

Many studies have concluded that financial sector development plays an important role in enhancing economic growth, strengthening resilience and promoting monetary and financial stability. The literature has established that there is a two-way relationship between financial sector development and economic growth, as measured by the level of per capita income. Increased financial sector development may cause higher economic growth. On the other hand, the growth of the real economy can also lead to the growth of the financial sector as demand for financial services grows from the real sector. Ratna Sahay et al. (2015) provide a detailed literature review of theoretical and empirical studies on the subject. The conclusions of selected major studies on the relationship between the development of the financial sector and economic growth are presented in Table 5.1.

Financial sector development usually enhances a country's resilience, stability and economic growth. However, trade-offs between economic growth and financial stability may arise. A large number of theoretical and empirical studies find that financial sector development can produce benefits through mobilising savings, facilitating increased information sharing and better resource allocation, and promoting diversification and management of various risks. A deep and liquid financial sector can strengthen financial stability with diverse financial instruments and assist in strengthening resilience to external and internal shocks. However, at high levels of financial sector development, there could be situations when there is 'too much easy finance'. In this situation, the costs are more significant than the benefits of financial sector development (ibid.).
<table><caption>**Table 5.1** Main findings of literature review on the relationship between the development of the financial sector and economic growth</caption><thead><tr><td>Author (date)</td><td>Objective of the paper</td><td>Main conclusions/findings</td></tr></thead><tbody><tr><td>Sahay et al. (2015)</td><td><ul><li>To explore the effects of finance or financial sector development on economic growth</li><li>To examine if growth and stability can be obtained from further financial sector development in most emerging market economies using a new, broad measure of financial sector development</li><li>To conduct an empirical analysis on the relationship between financial sector development and economic growth based on a sample of 128 countries</li></ul></td><td><ul><li>Sizeable impacts of improved financial intermediation on aggregate productivity and income</li><li>Effect of financial development on economic growth is bell-shaped as it reduces at higher levels of financial sector development. This reduction effect originates from financial deepening rather than from greater access or higher efficiency and reflects mainly the impact of financial deepening on total factor productivity growth, instead of on capital accumulation</li><li>When the pace of financial development progresses rapidly, deepening financial institutions may create economic and financial instability. It promotes greater risk-taking and high leverage, in the case of poor regulation and supervision</li><li>There is a small subset of many existing regulatory principles which is critical for financial development and stability. This implies that there is little to no conflict between promoting financial stability and financial development</li></ul></td></tr><tr><td>Aizenman et al. (2015)</td><td><ul><li>To study the relationship between financial sector development and growth using the sector-level data of 41 economies</li></ul></td><td><ul><li>Financial sector development caused a rise in growth, but only up to a point, beyond which additional financial deepening could actually reduce growth</li></ul></td></tr><tr><td>Barajas et al. (2013), Nili and Rastad (2007), Khan et al. (2001)</td><td><ul><li>To study the empirical relationship between financial sector development and economic growth across countries in various regions</li></ul></td><td><ul><li>The contribution of financial development to growth differs across regions, countries and income levels. This indicates that general results cannot be applied to any country</li></ul></td></tr><tr><td>Levine (2005)</td><td><ul><li>To review theoretical models explaining the impact of financial sector development on economic growth based on endogenous growth and various functions of the financial sector</li></ul></td><td><ul><li>Theoretical models show that major channels through which finance is expected to impact economic growth include: producing information; allocating capital to productive uses; monitoring investments and exerting corporate control; facilitating trading, diversification and management of risk; mobilising and pooling savings; and easing the exchange of goods and services</li></ul></td></tr></tbody></table>

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<table><caption>**Table 5.1 (continued)**</caption><thead><tr><td>Author (date)</td><td>Objective of the paper</td><td>Main conclusions/findings</td></tr></thead><tbody><tr><td>King and Levine (1993)</td><td><ul><li>To undertake the first cross-country regression analysis to test the causality from the initial level of the financial depth (size of the assets of the banking sector relative to GDP) to economic growth, controlling for other explanatory variables</li></ul></td><td><ul><li>Finds empirical evidence that financial deepening enhances economic growth, whereas financial institutions and markets assist in better financial intermediation and resource allocation</li><li>The diversification and management of risk enhance financial stability to the extent that deep and liquid financial systems with diverse financial instruments facilitate the mitigation of the impact of shocks</li></ul></td></tr><tr><td>McKinnon (1973), Shaw (1973)</td><td><ul><li>To study the role of the financial sector in promoting economic growth</li></ul></td><td><ul><li>Argues that obstacles to financial development (such as financial repression) are expected to adversely impact growth by limiting the amount of savings that could be mobilised for investment purposes, and by preventing financial intermediation from channelling these resources into the most productive activities in the economy</li></ul></td></tr><tr><td>Gole and Sun (2013)</td><td><ul><li>To empirically examine the potential relationships between financial structures and economic outcomes</li></ul></td><td><ul><li>Certain financial intermediation structures are expected to be more closely related to positive economic outcomes than others</li><li>Protective financial buffers within financial institutions are associated with improved economic performance, and a financial sector dominated by non-traditional bank intermediation or foreign banks has in some cases been associated with adverse economic outcomes, especially during financial crises</li><li>Positive relationships between financial buffers and economic growth may weaken above a certain relatively high threshold—a too-safe system may limit the available funds for credit and hence reduce economic growth</li></ul></td></tr></tbody></table>

Source Ratna Sahay et al. (2015)

If financial instability persists for a long period, it can cause a financial crisis, as evidenced by the 1982 and 1994 Mexican and Latin American crises, the 1990s Asian and Russian crises, and the 2008 global financial crisis (Bhattacharyay 2009). The COVID-19 pandemic, which started in early 2020, caused serious instability in the financial sectors worldwide. It is therefore of utmost importance to examine the resilience and stability of a country at this juncture. In order to analyse this
against domestic and external shocks, there is a need for a comprehensive and in-
depth assessment of a country’s financial sector and financial sector development,
particularly in terms of depth, access, financial inclusion and efficiency.

5.3 Policies and Strategies for Financial Sector Development

In recent years, the government of Brunei has adopted several policies, strategies and reforms to develop the financial sector through long-term economic and financial sector development plans. For example, Wawasan Brunei 2035 is Brunei's long-term economic plan (see Chap. 1), while the FSBP 2016–2025 is a long-term financial sector development strategy aimed to help achieve the objectives of that plan, including enhancing Brunei's financial services sector into one of Asia's most competitive and innovative hubs. As a result, utilising large opportunities and based on the strength of Asia (the world's fastest-growing region), the financial sector's contribution to GDP is expected to increase to 8% in 2025 from 6% in 2015 (AMBD 2017b). The five pillars of the FSBP are:

1. Monetary and financial stability;

2. Competitive and innovative financial institutions and services;

3. Robust and modern infrastructure;

4. Enhanced international integration;

5. Human capital development.

The FSBP's long-term vision for the role of the financial sector includes:

1. Financial services as an enabler for growth;

2. Provider of niche financial services;

3. Competitive and innovative financial institutions and services;

4. Development of a supportive ecosystem;

5. Shift from government dependence to self-reliance.

The specific targets of the FSBP are:

1. Creation of a Brunei Association of Banks (BAB) business forum;

2. BAB participation in the ASEAN Banking Council;

3. Development of the small- and medium-sized enterprise (SME) sector;

4. Enabling and increasing financial literacy in the country and increasing public awareness on important issues. (BDCB n.d.)

To achieve these goals, it is necessary to maintain the stability, resilience and continuous development and modernisation of Brunei's financial sector. In light of this, the Central Bank (and formerly the AMBD) is developing and implementing an effective framework to monitor financial stability. As a result, one of the recommendations of the FSBP is in the area of macro-prudential policy: 'AMBD will continue to monitor international practices in the use of macro-prudential policy, with a view,
judiciously, to use macro-prudential tools to influence the rate of expansion in the financial sector, where that is considered necessary to maintain macro financial and monetary stability' (AMBD 2016a: 34).

In addition to regulating the financial sector, the Central Bank also manages monetary policy, including the Currency Interchangeability Agreement (CIA) 1967 with Singapore, under which the Bruneian dollar is interchangeable at par with the Singapore dollar (AMBD 2017b; BDCB 2024a). The Singapore currency is accepted in Brunei and vice versa, with the Central Bank charged with maintaining parity between the two currencies. The monetary policy framework in Brunei is based on a currency board system with the Brunei dollar pegged to the Singapore dollar at par.

Under the CIA, the currency board under the Central Bank backs up the total amount of currency issued in the economy with an equivalent amount held in its reserves. As per the Currency and Monetary Order 2004, only the Central Bank can issue Brunei notes and coins, and the Central Bank needs to back up every note and coin issued with foreign exchange reserves to maintain confidence and stability in the Brunei dollar, thus promoting trade and investment. Due to the CIA, the policy of the Monetary Authority of Singapore determines the monetary conditions in Brunei. Instead of an interest rate policy, Singapore uses the management of the exchange rate as its monetary policy tool. Singapore's monetary policy has been effective for the macroeconomic stability of Brunei because its inflation has been low and stable, averaging 1.1% in 1983–2018. Consequently, the Brunei dollar is effectively managed by the Monetary Authority of Singapore through the management of the Singapore dollar. Pegging the Brunei dollar to the Singapore dollar is appropriate, providing a credible monetary anchor and stability to the financial sector. There are no exchange controls or forward markets for foreign exchange in Brunei.

## 5.4 Structure of the Financial Sector

Financial sectors include banks, non-bank financial institutions, and stock and bond markets. Brunei's financial sector consists of a dual financial system: domestic Islamic and conventional financial institutions, and foreign/international financial institutions. There are both Islamic and conventional banks, insurance and financing companies. Islamic financing institutions were dominant players accounting for a major portion (61%) of total financial assets as of 2017.

The main professional body of banks in Brunei is the BAB, which 'provides for the orderly conduct of banking business and activities in Brunei Darussalam ... to protect and serve the best interest of its customers with improved and more transparent services and regulations' (BAB n.d.). The BAB accomplishes this by:

1. Acting as a platform for discussion with timely framing of rules to guide member banks;

2. Supporting the policies and initiatives set out by the Central Bank and other best practices;
3. Collaboration with similar bodies and other related stakeholders, both locally and internationally. (ibid.)

Meanwhile, the main professional body for the *takaful*/insurance sector is the Brunei Insurance and Takaful Association (BITA), which has both Islamic and conventional members. The objectives of BITA are to:

1. Lobby on behalf of the sector's takaful and insurance companies;

2. Promote the industry to the public;

3. Work to ensure best practices and common standards among members.

The central regulatory authority for the financial sector is the Central Bank (formerly AMBD). As per the Autoriti Monetari Brunei Darussalam Order 2010, it was established as a statutory corporate body and its major objectives are:

1. To achieve and maintain domestic price stability;

2. To ensure the stability of the financial system, in particular by formulating financial regulations and prudential standards;

3. To assist in the establishment and functioning of efficient payment systems and to oversee them;

4. To foster and develop a sound and progressive financial services sector. (AGC 2010)

In addition to the Central Bank (formerly AMBD), the Brunei Darussalam Deposit Protection Corporation (BDPC) was established in 2011 under the Deposit Protection Order 2010 to administer a deposit protection scheme. The objective of the BDPC is to protect depositors against the loss of their deposits in the unlikely event the member institution (banks/finance companies) is unable to meet its obligations to depositors. Under this scheme, the losses of deposits are limited to BND50,000 per depositor per member institution. The major functions of BDPC are:

1. To administer a deposit protection scheme for the member institutions;

2. To provide protection against the loss of part or all of the deposits of a member institution;

3. To provide incentives for sound risk management in the financial system;

4. To promote or contribute to the stability of the financial system. (MoFE 2023)

Furthermore, since 2006 Brunei has had a Syariah Financial Supervisory Board which oversees issues of syariah compliance across Islamic financial institutions. The Centre for Islamic Banking, Finance and Management (CIBFM) was also established as an education and training arm of the AMBD to improve the standards of professionalism and innovation in the Islamic financial sector.

For better access to credit information, the Credit Bureau was established in 2012 under the AMBD to collate information on the creditworthiness of loan applicants. The statistics provided by the bureau facilitate the Central Bank (formerly the AMBD) to monitor the health of the borrower and the amount of credit being extended. The objective of the bureau is to collect credit information from various sources and provide member banks and other institutions with references for each
borrower. In 2018 the AMBD introduced a credit scoring system that promotes better financing conditions by assisting lenders to better price credit risks. The provision of consumer and commercial credit scores to banks and other financial institutions can assist them to better assess the credit risk of corporate and household borrowers, thus enhancing the sector's financial stability (AMBD 2019a).

There are four components of the financial sector: banking, non-banking, investment management and advisory companies, and money charger and money remittance businesses. The non-bank financial sector comprises insurance sector conventional and Islamic insurance companies, conventional financing companies and Islamic financing companies. At present, the Bruneian financial sector consists of:

1. Seven conventional commercial banks: four regional/foreign banks, one international bank and two local or domestic banks (one with restricted licence);

2. One Islamic bank;

3. One Islamic trust fund undertaking banking activities;

4. One Islamic SME bank;

5. Two financing companies, one conventional and one Islamic, both wholly owned subsidiaries of two domestic banks;

6. Twelve insurance companies: four Islamic and eight conventional;

7. Twenty-two money changers and 19 money remittance businesses;

8. Six offices of regional and international banks and other companies for asset/investment management, investment advisory and corporate banking purposes only.

Other foreign banks also have local offices for asset management and corporate banking activities. For example, Malaysia's Commerce International Merchant Bankers (CIMB), France's BNP Paribas and Singapore's United Overseas Bank (UOB) Asset Management.

Brunei does not currently have a stock and a bond market, but the Ministry of Finance and Economy is spearheading a project to establish a stock exchange. In March 2020 the second finance and economic minister informed the Legislative Council that work was ongoing to establish Brunei's stock exchange, including the identification of companies to be listed initially. The minister affirmed that the establishment of the stock exchange would facilitate economic growth and business development by advancing and diversifying access to alternative financing (other than bank loans) for businesses in Brunei. An active and developed stock market would promote more business opportunities with other stock exchanges in the ASEAN region. He mentioned that the stock market will adopt best practices and international standards to enable interconnectivity with global financial markets and to bring in international investors and businesses. The activities below are being pursued by relevant agencies to implement the stock exchange:

1. Strengthening existing legislation such as the Companies Act, Securities Market Order and Securities Market Regulation;

2. Disseminating information on the capital market ecosystem to stakeholders;

3. Preparing listing and trading rules;
4. Allocating a BND414 million budget for the formation of the stock exchange and related infrastructure, technology and socioeconomic studies. (Nabilah 2020)

The regulatory foundations for Brunei's first stock market are expected to be completed soon, although there is no timeline for the launch of the stock market (Analisa 2023).

There have also been some major changes in the structure of Brunei's financial sector. For example, the merger of the Islamic Bank of Brunei and the Islamic Development Bank of Brunei to form Bank Islam Brunei Darussalam (BIBD) in 2005. On the other hand, two international banks exited Brunei: US-based Citibank left in March 2014 after 41 years; and the Hongkong and Shanghai Banking Corporation (HSBC) left in 2017 after 70 years, leaving behind its 500 employees and nine branches, as well as HSBC Finance (Brunei) which is a subsidiary of HSBC Holdings for car hire purchase. UOB also sold its retail banking division, including all assets and retail banking services, to the local Baiduri Bank on 20 October 2015.

Moreover, there was a closing of international offshore activities: no banks are licensed under the International Banking Order 2000; the Royal Bank of Canada surrendered its restricted banking licence in October 2016; and the last international offshore bank, Sun Hung Kai International (Brunei), exited in July 2017. A notice issued on 22 December 2016 ordered all offshore companies registered or licensed in Brunei to wind up and move to other jurisdictions no later than 24 December 2017. The main objective of this policy was to decrease the risk of money laundering and financing of terrorism.

Several investment, asset management and advisory companies also closed their businesses in Brunei, such as AmCapital and Amundi Asset Management. One final change is that the Bank of China (Hong Kong) opened its first branch in Brunei in December 2016. The structure of the banking sector remained unchanged in 2019 with eight full-fledged banks, including one Islamic bank, one Islamic trust fund, one restricted banking licence and one Islamic SME bank (BDCB 2024b). Table 5.2 presents the structure of the financial sector in Brunei, namely banks, financing and insurance companies, and investment management and advisory companies as of 2020.

## 5.5 Trends in the Development of the Banking Sector

This section uses multiple indicators to examine the trends in the development of Brunei's banking sector from 2014 to 2018. A country's financial development can be defined as a combination of:

1. Depth: the size and liquidity of financial markets;

2. Access and financial inclusion: the ability of individuals and companies to access financial services;

3. Efficiency: the ability of financial institutions to provide financial services at low costs and with sustainable revenues, and the level of activity of capital markets. (IMF 2019)
<table><caption>**Table 5.2** Brunei Darussalam: Structure of the financial sector, 2020</caption><thead><tr><th>Name</th><th>Type</th><th>Date of establishment</th><th>Country of incorporation, type of entity</th><th>Number of branches</th></tr></thead><tbody><tr><td colspan="5">Local/domestic banks</td></tr><tr><td>Baiduri Bank</td><td>Conventional commercial bank</td><td>January 1993</td><td>Brunei, incorporated under Companies Act</td><td>13 branches including headquarters</td></tr><tr><td>Bank Islam Brunei Darussalam</td><td>Islamic bank</td><td>February 2005</td><td>Brunei, body corporate</td><td>15 branches including headquarters</td></tr><tr><td>Perbadanan Tabung Amanah Islam Brunei (TAIB)</td><td>Islamic trust fund undertaking banking business</td><td>October 1991</td><td>Brunei, body corporate</td><td>8 branches including headquarters</td></tr><tr><td colspan="5">Regional and international banks</td></tr><tr><td>RHB Bank</td><td>Conventional commercial bank</td><td>1964</td><td>Malaysia, registered under Companies Act</td><td>1 headquarters/ branch</td></tr><tr><td>Standard Chartered Bank</td><td>Conventional commercial bank</td><td>April 1958</td><td>United Kingdom, registered under Companies Act</td><td>7 branches including headquarters</td></tr><tr><td>State Street (Brunei) (restricted banking licence)</td><td>Conventional commercial bank undertaking custodian service in Brunei</td><td>2011</td><td>Brunei, incorporated under Companies Act</td><td>1 headquarters/ branch</td></tr><tr><td>United Overseas Bank</td><td>Conventional commercial bank undertaking corporate banking in Brunei</td><td>1974</td><td>Singapore, registered under Companies Act</td><td>1 headquarters/ branch</td></tr><tr><td>Bank of China (Hong Kong)</td><td>Conventional commercial bank</td><td>April 2016</td><td>Hong Kong, registered under Companies Act</td><td>1 headquarters/ branch</td></tr><tr><td>Malayan Banking Berhad</td><td>Conventional commercial bank</td><td>1960</td><td>Malaysia, registered under Companies Act</td><td>2 branches including headquarters</td></tr><tr><td>Bank Usahawan</td><td>Islamic bank undertaking financing to micro, small and medium enterprise (MSME) only</td><td>2017</td><td>Brunei, incorporated under Companies Act</td><td>3 branches including headquarters</td></tr></tbody></table>

(continued)
<table><caption>**Table 5.2 (continued)**</caption><thead><tr><th>Name</th><th>Type</th><th>Date of establishment</th><th>Country of incorporation, type of entity</th><th>Number of branches</th></tr></thead><tbody><tr><td colspan="5">Non-bank financing companies</td></tr><tr><td>Baiduri Finance</td><td>Conventional finance company</td><td>1996</td><td>Brunei, incorporated under Companies Act</td><td>2 branches including headquarters</td></tr><tr><td>Bank Islam Brunei Darussalam At-Tamwil</td><td>Islamic finance company</td><td>2005</td><td>Brunei, incorporated under Companies Act</td><td>2 branches including headquarters</td></tr><tr><td colspan="5">Investment management and advisory companies</td></tr><tr><td>CIMB Investment Bank</td><td>Investment adviser</td><td></td><td>Malaysia, registered under Companies Act</td><td>1 branch</td></tr><tr><td>BNP Paribas Asset Management</td><td>Investment adviser</td><td></td><td>France, registered under Companies Act</td><td>1 branch</td></tr><tr><td>UOB Asset Management</td><td>Investment management and adviser</td><td></td><td>Singapore, registered under Companies Act</td><td>1 branch</td></tr><tr><td>Lion Global Investors (subsidiary of the Oversea-Chinese Banking Corporation Group)</td><td>Investment adviser, a syariah-compliant private equity firm</td><td>2008</td><td>Singapore, registered under Companies Act</td><td>1 branch</td></tr><tr><td>SBI (B)</td><td>Investment adviser</td><td></td><td>Brunei incorporated under Companies Act</td><td>1 branch</td></tr><tr><td>Seri Venture Capital Management</td><td>Investment adviser</td><td></td><td>Brunei, incorporated under Companies Act</td><td>1 branch</td></tr><tr><td colspan="5">Insurance sector</td></tr><tr><td>Name of the takaful/insurance company</td><td>Classification</td><td>Date of establishment</td><td>Relation to other companies</td><td>Country of incorporation and type of entity</td></tr><tr><td>AIA Brunei</td><td>Life insurer</td><td>11 July 1923 (registered on 7 February 2007)</td><td>Branch of AIA Group</td><td>Hong Kong</td></tr></tbody></table>

(continued)
<table><caption>**Table 5.2 (continued)**</caption><thead><tr><th colspan="5">Insurance sector</th></tr><tr><th>Name of the<br>takaful/insurance<br>company</th><th>Classification</th><th>Date of<br>establishment</th><th>Relation to other<br>companies</th><th>Country of<br>incorporation<br>and type of<br>entity</th></tr></thead><tbody><tr><td>Audley Insurance</td><td>General insurer</td><td>30 October<br>1996 (registered<br>on 7 February<br>2007)</td><td>Subsidiary of<br>Brunei Investment<br>Agency</td><td>Brunei</td></tr><tr><td>Great Eastern Life<br>Assurance</td><td>Life insurer</td><td>19 March 1975<br>(registered on<br>19 May 2009)</td><td>Subsidiary of Great<br>Eastern Holdings</td><td>Singapore</td></tr><tr><td>Insurans Islam<br>TAIB Family<br>Takaful</td><td>Family takaful<br>insurer</td><td>30 July 2013</td><td>Subsidiary of TAIB</td><td>Brunei</td></tr><tr><td>Insurans Islam<br>TAIB General<br>Takaful</td><td>General takaful<br>insurer</td><td>30 July 2013</td><td>Subsidiary of TAIB</td><td>Brunei</td></tr><tr><td>MBA Insurance</td><td>General insurer</td><td>25 April 2007</td><td></td><td>Brunei</td></tr><tr><td>National Insurance</td><td>General insurer</td><td>24 December<br>1969 (registered<br>on 23 June<br>2007)</td><td></td><td>Brunei</td></tr><tr><td>Standard Insurance</td><td>General insurer</td><td>1995 (registered<br>on 17 July<br>2010)</td><td></td><td>Brunei</td></tr><tr><td>Takaful Brunei Am</td><td>General takaful<br>insurer</td><td>22 February<br>2002 (registered<br>on 18 October<br>2012)</td><td>Subsidiary of<br>Takaful Brunei</td><td>Brunei</td></tr><tr><td>Takaful Brunei<br>Keluarga</td><td>Family takaful<br>insurer</td><td>22 February<br>2002 (registered<br>on 18 October<br>2012)</td><td>Subsidiary of<br>Takaful Brunei</td><td>Brunei</td></tr><tr><td>Tokio Marine<br>Insurance<br>Singapore</td><td>General insurer</td><td>11 July 1923<br>(registered on<br>11 March 2009)</td><td>Branch of Tokio<br>Marine Singapore</td><td>Singapore</td></tr><tr><td>Tokio Marine Life<br>Insurance<br>Singapore</td><td>Life insurer</td><td>21 May 1948<br>(registered on<br>22 November<br>2010)</td><td>Branch of Tokio<br>Marine Singapore</td><td>Singapore</td></tr></tbody></table>

Source AMBD (2017b, 2020)
As Brunei does not have a bond or stock market and the banking sector accounts for 83.3% of the financial sector's assets, this section focuses on banking sector development. However, analysis of the ratio of bond financing to GDP and stock market capitalisation to GDP can reveal the adequacy of a country's bond and stock market to the size of its economy.

Establishing a causality relationship empirically from financial sector development to economic growth remains challenging. A majority of the empirical literature since the 1970s uses the ratio of private credit to GDP and, to a lesser extent, stock market capitalisation as a ratio to GDP as proxies of financial sector development. However, in view of the diversity and heterogeneity of financial sectors across countries worldwide, there is a need to use multiple indicators to measure the level of financial sector development (Sahay et al. 2015).

Based on the availability of the time series data during 2014–2018 on the banking sector of Brunei, the following 24 indicators are considered to examine the trends in the development of the banking sector in terms of depth, financial access, financial inclusions and efficiency. These indicators are presented below in percentage (%) or percentage changes year-on-year (y-o-y). Nine indicators are used to assess the depth of the banking sector:

1. Asset and its percentage change (y-o-y)

2. Assets/nominal GDP (%)

3. Deposits and their percentage change (y-o-y)

4. Deposits/nominal GDP (%)

5. Credit and its percentage change (y-o-y)

6. Credit/nominal GDP (%)

7. Private sector credit and its percentage change (y-o-y)

8. Private sector credit/nominal GDP (%)

9. Credit to deposits ratio (%)

Domestic credit/financing to the private sector refers to financial resources provided to the sector, such as through loans, purchases of non-equity securities, trade credits and other accounts receivable. Meanwhile, 10 indicators are used to consider the financial access and financial inclusion of the banking sector:

1. Number of deposit accounts

2. Number of deposit accounts per 1,000 adults

3. Number of loan/financing accounts

4. Number of credit/financing accounts per 1,000 adults

5. Number of accounts per 1,000 adults

6. Number of banks

7. Number of bank branches per 100,000 adult population

8. Number of bank branches per 1,000 km²

9. Number of automated teller machines (ATMs)

10. Number of ATMs per 100,000 adult population
The efficiency of the banking sector is considered by:

1. Return on assets

2. Return on equity

3. Non-interest expense to gross income (efficiency ratio)

4. Net interest margin

5. Lending-deposits spread

**5.5.1 Trends in the Depth of the Banking Sector**

Brunei witnessed a significant contraction in the economy as measured by nominal GDP in 2014–2018 and moderate growth in 2017–2018. As a result, per capita GDP (at current prices) declined by 22.2% (from BND53,149 in 2014 to BND41,367 in 2018). These contractions affected the financial sector's development. With the second highest GDP per capita among all ASEAN countries, Brunei remains one of the most advanced economies in the Southeast Asian region.

Table 5.3 presents trends in the depth of Brunei's banking sector in 2014–2018. One of the four major findings of the analysis is that the banking sector's depth and intermediation remained lower throughout the study period compared to most ASEAN and Gulf Cooperation Council (GCC) countries, as reflected in low asset, deposit and loans/financing, the credit to private sector ratio relative to nominal GDP and credit to deposit ratio. Second, the bank asset to GDP ratio was comparatively low at 86% in 2014 and 114% in 2016, with a contraction in the total volume of assets in 2014, 2015 and 2017. In 2017 the indicator was 104.4% compared to Singapore (151.7%), Qatar (150%), Thailand (139%), Vietnam (137.4%), Malaysia (131.9%), United Arab Emirates (UAE) (109.7%) and Kuwait (108.6%) (Global Economy 2024e). Third, in terms of deposit mobilisation, bank performance has been modest as the deposit to GDP ratio ranged between 74% in 2014 and 96% in 2016, with a contraction in the total volume of deposits in 2014, 2015 and 2017. This ratio was 83.8% in 2017, lower than Thailand (126.1%), Singapore (121.6%), Malaysia (113.4%), Kuwait (95.3%) and Qatar (88.5%). Fourth, the performance of banks in Brunei in terms of depth and intermediation has been weak and limited compared to ASEAN and GCC countries. This is reflected by:

1. Very low credit/financing to GDP ratio (from 26% in 2014 to 34% in 2015), with contraction in volume of credit in 2016 and 2017;

2. Very low private credit/financing to GDP ratio (from 24.6% in 2014 to 32.7% in 2016), with contraction in volume of private credit in 2016, 2017 and 2018;

3. In 2018 private credit/financing to GDP ratio was 25.8%, much lower than Vietnam (133.1%), Malaysia (120.4%), Singapore (118.9%), Thailand (112.2%), Cambodia (99.4%), Kuwait (89.3%), Qatar (76.9%), UAE (73.3%), Oman (70.5%), the Philippines (47.6%) and Indonesia (32.7%) (Global Economy 2024c);

4. Very low credit/financing to deposit ratio (from 34% in 2017 to 43% in 2015), declining in 2015–2017 against the backdrop of declining credit/financing growth
to the private sector in 2016–2018. In 2017 this ratio was much below Indonesia (91.6%), Malaysia (102.3%), the Philippines (67%), Singapore (105.4%), Thailand (99%), Cambodia (111.9%), Vietnam (676.3%), Oman (137.4%), Qatar (84.4%), Saudi Arabia (141.6%), Kuwait (102%) and UAE (93.2%). (Global Economy 2024d)

This low credit/financing to deposit ratio indicates that an excess of liquidity accumulated by the banking sector, which could not be invested domestically, is invested in offshore assets in the form of placements and investments. Instead of investing abroad, this excess liquidity can be utilised to provide suitable lending products to MSMEs to support Wawasan Brunei 2035 in developing local businesses. In addition, banks can lend to overseas customers and enhance income and profitability. The offshore assets of the banking sector in the form of placements and investments abroad accounted for 55.8% of total assets and 66.7% of total deposits in 2018. The

<table><caption>**Table 5.3** Brunei Darussalam: Trends in the development of the depth of the banking sector, 2014–2018</caption><thead><tr><th>Indicators</th><th>Units</th><th>2014</th><th>2015</th><th>2016</th><th>2017</th><th>2018</th></tr></thead><tbody><tr><td rowspan="2">Nominal GDP</td><td>BND billion</td><td>21.7</td><td>17.8</td><td>15.7</td><td>16.7</td><td>18.3</td></tr><tr><td>Year-on-year % change</td><td>-4.3%</td><td>-18.0%</td><td>-11.4%</td><td>6.4%</td><td>9.3%</td></tr><tr><td rowspan="2">Per capita GDP (at current price)</td><td>USD</td><td>53,149*</td><td>43,109</td><td>37,741</td><td>38,993</td><td>41,367</td></tr><tr><td>Year-on-year % change</td><td>-5.3%</td><td>-18.9%</td><td>-12.5%</td><td>3.3%</td><td>6.0%</td></tr><tr><td rowspan="2">Assets</td><td>BND billion</td><td>18.7</td><td>17.0</td><td>18.0</td><td>17.5</td><td>18.3</td></tr><tr><td>Year-on-year % change</td><td>-3.5%</td><td>-8.8%</td><td>5.3%</td><td>-2.6%</td><td>4.8%</td></tr><tr><td>Assets/nominal GDP</td><td>%</td><td>86.2%</td><td>95.9%</td><td>114.0%</td><td>104.4%</td><td>100.2%</td></tr><tr><td rowspan="2">Deposits</td><td>BND billion</td><td>16.0</td><td>14.2</td><td>15.1</td><td>14.9</td><td>15.3</td></tr><tr><td>Year-on-year % change</td><td>-4.3%</td><td>-11.0%</td><td>6.0%</td><td>-1.6%</td><td>3.2%</td></tr><tr><td>Deposits/nominal GDP</td><td>%</td><td>73.9%</td><td>80.1%</td><td>95.8%</td><td>88.7%</td><td>83.8%</td></tr><tr><td rowspan="2">Credits/financing</td><td>BND billion</td><td>5.7</td><td>6.1</td><td>5.4</td><td>5.1</td><td>5.5</td></tr><tr><td>Year-on-year % change</td><td>1.6%</td><td>7.0%</td><td>-11.6%</td><td>-5.1%</td><td>6.3%</td></tr><tr><td>Credit/financing to nominal GDP</td><td>%</td><td>26.4%</td><td>34.4%</td><td>34.3%</td><td>30.6%</td><td>29.8%</td></tr><tr><td rowspan="2">Private sector credit</td><td>BND billion</td><td>5.3</td><td>5.6</td><td>5.2</td><td>4.9</td><td>4.7</td></tr><tr><td>Year-on-year % change</td><td>2.9%</td><td>4.5%</td><td>-7.6%</td><td>-4.7%</td><td>-3.8%</td></tr><tr><td>Private sector credit to nominal GDP</td><td>%</td><td>24.6%</td><td>31.4%</td><td>32.7%</td><td>29.3%</td><td>25.8%</td></tr><tr><td>Credit/financing to deposits ratio</td><td>%</td><td>35.7%</td><td>42.9%</td><td>35.8%</td><td>34.5%</td><td>35.6%</td></tr></tbody></table>

Source AMBD (2015, 2016b, 2017a, 2019a, b, c); DEPS (2023)

Note * Per capita GDP for 2013 was 56,134 (ADB 2024)
ratio of total offshore assets to total deposits increased from 60.1% in 2016 to 66.7% in 2018 (AMBD 2019b).

There is a need to closely monitor risks associated with cross-border placements and investments, such as currency risk, country risk, counterparty risk and liquidity risk. A significant loss of the net asset value of offshore assets may adversely affect the liquidity of banks. However, a major portion of offshore assets (76.8%) was in the form of placements in reputed foreign banks. This ensures adequate liquidity in the banking sector. The liquidity ratio of the banking sector as measured by the liquid assets to total assets and the liquid assets to total deposits were 51.7% and 61.8% in 2018.

### 5.5.2 Trends in the Financial Access and Financial Inclusion of the Banking Sector

Trends in the financial access and financial inclusion of the banking sector in 2014–2018 are shown in Table 5.4. The major findings of the analysis are as follows.

1. Access to banks and financial inclusion of Brunei on average have been significantly higher than its ASEAN and GCC peers due to a relatively large number of bank accounts, bank branches and ATMs compared to the adult population and geographical area.

2. Trends in the number of deposit and credit accounts can indicate the outreach or financial access to the banking sector. The number of deposit accounts maintained a moderate increasing trend, except for a 2.1% decline in 2017 compared to 2016 despite positive economic growth in 2017. After a small rise in 2015, the number of deposit accounts with banks per 1,000 adults showed a decreasing trend from 2,011 in 2015 to 1,910 in 2017, rising slightly to 1,946 in 2018.

3. The number of credit accounts declined significantly by 34% in 2014–2018, indicating a decrease in intermediation/outreach partially due to a loss of the existing client base, consolidation of multiple accounts by single borrowers and the exit of Citibank and HSBC. The indicator shows a continuous decreasing trend throughout the study period except for a slight rise in 2017. Consequently, the number of credit accounts per 1,000 adults declined to 345 in 2018 from 628 in 2014—a 45.1% decline.

4. The number of bank accounts per 1,000 adults remained high during the study period but witnessed a declining trend reaching 1,501 in 2017 from 1,624 in 2014. In 2017 the indicator for Brunei was second highest among ASEAN and GCC countries after Singapore (2,299), and much higher than Kuwait (1,393.2), Thailand (1,270.5), UAE (1,065.4), Saudi Arabia (1,046.0), Malaysia (846.3), Qatar (739.6) and the Philippines (510.1) (Global Economy 2024b).

5. The number of bank branches per 100,000 adult population in Brunei is the highest among most ASEAN and GCC countries. This indicator, however, declined continuously in 2015–2018, reaching 17.3 in 2018 from 21.0 in 2015. In
<table><caption>**Table 5.4** Brunei Darussalam: Trends in the development of financial access and financial inclusion in the banking sector, 2014–2018</caption><thead><tr><th>Indicators</th><th>2014</th><th>2015</th><th>2016</th><th>2017</th><th>2018</th></tr></thead><tbody><tr><td>Total number of deposit accounts</td><td>616,206</td><td>633,406</td><td>633,912</td><td>620,350</td><td>642,717</td></tr><tr><td>Number of deposit accounts with banks per 1,000 adults</td><td>1,991.16</td><td>2,011.06</td><td>1,983.85</td><td>1,910.30</td><td>1,946.52</td></tr><tr><td>Number of loans/financing accounts</td><td>247,486</td><td>247,956</td><td>157,448</td><td>176,210</td><td>161,995</td></tr><tr><td>Number of loans/financing per 1,000 adults</td><td>627.99</td><td>635.65</td><td>392.09</td><td>405.45</td><td>345.64</td></tr><tr><td>Number of accounts per 1,000 adults</td><td>1,623.5</td><td>1,579.2</td><td>1,547.5</td><td>1,500.5</td><td>—</td></tr><tr><td>Number of banks</td><td>10</td><td>9</td><td>9</td><td>10</td><td>10</td></tr><tr><td>Number of bank branches per 100,000 adult population</td><td>20.36</td><td>20.95</td><td>19.72</td><td>18.48</td><td>17.26</td></tr><tr><td>Number of bank branches per 1,000 km<sup>2</sup></td><td>12.0</td><td>12.5</td><td>12.0</td><td>11.4</td><td>10.8</td></tr><tr><td>Number of ATMs per 100,000 adult population</td><td>78.8</td><td>81.0</td><td>75.3</td><td>68.5</td><td>74.3</td></tr><tr><td>Number of ATMs</td><td>253</td><td>251</td><td>244</td><td>226</td><td>226</td></tr></tbody></table>

Source AMBD (2019a); Fred Economic Data (2022a, b); Knoema (2021, 2024a)

2017 the indicator was 18.5, higher than Indonesia (16.9), Oman (14.8), Kuwait (14.5), Thailand (11.9), UAE (11.3), Malaysia (10.1), Qatar (9.2), the Philippines (9.1), Saudi Arabia (8.5), Singapore (8.5), Cambodia (7.5) and Vietnam (3.4).

6. The number of bank branches per 1,000 km² is high but declined continuously in 2015–2018, reaching 10.8 in 2018 from 12.5 in 2015. This may be due to the exit of Citibank and HSBC, a lack of expansion of bank branches or bank strategy to reduce fixed cost through the promotion of online banking.

7. The number of ATMs per 100,000 adult population followed a similar trend with high values that declined—from 81.0 in 2015 to 74.3 in 2018. In 2008 the performance of Brunei was better than Saudi Arabia (73.4), Kuwait (73.0), Singapore (66.5), UAE (63.9), Qatar (55.8), Indonesia (54.7), Malaysia (46.6), Oman (34.8), the Philippines (29.1) and Vietnam (25.3). Thailand (115.1), however, performed much better than Brunei (Global Economy 2024a).

### 5.5.3 Trends in the Efficiency of the Banking Sector

Table 5.5 exhibits the trends in the efficiency of the banking sector in 2014–2018. The major findings of the analysis are presented below.

1. The efficiency of Brunei's banking sector, on average, remained at a moderate level. In terms of most indicators, the performance of the country is weak compared to several ASEAN and GCC peers.
2. The banking sector remained profitable during the study period. As measured by return on assets (ROA), after falling to 1% in 2016 from 1.4% in 2014, the profitability rose moderately to 1.5% in 2018. Return on equity (ROE) followed a similar trend, declining to 6.4% in 2016 from 10.1% in 2014 and rising again to 11.4% in 2018. This may be due to the reduction in the non-interest expense to gross income (efficiency ratio), higher net interest margin and high spread between reference lending and deposit rates. The average deposit interest rate of the banking sector was 0.78% in 2018 whereas the average lending interest rate for the household and business sectors was 6.01% and 5.87% (AMDB 2019a: Tables 11 and 12, author's computation).

3. In 2017 ROA of the banking sector was 1.3%, lower than Indonesia (2.5%), Saudi Arabia (2%), Malaysia (1.9%), Qatar (1.6%), Oman (1.6%), Thailand (1.5%) and the Philippines (1.5%), and equal to Singapore and Kuwait (Global Economy 2024h). This may be due to the low intermediation level compared to the above countries, as reflected by the very low credit to deposit ratio.

4. ROE of the banking sector in 2017 was 8.9%, much lower than Vietnam (17.6%), Indonesia (16.7%), Malaysia (15%), Qatar (14.2%), the Philippines (13.9%), Singapore (13.2%), Saudi Arabia (12.6%), Thailand (11.5%), Oman (10.8%), UAE (10.3%), Bahrain (10%) and Kuwait (9.7%) (Global Economy 2024i). This may be due to the low intermediation level compared to the above countries as reflected in a very low credit to deposit ratio.

5. Expense to income ratio (non-interest expense to gross income) remained high compared to its GCC peers, from 53.4% in 2014 to 48.1% in 2018. In 2017 the ratio for Brunei was 52.4%, higher than Qatar (33.1%), Kuwait (36.9%) and the UAE (37%).

6. The net interest margin (NIM) is one indicator of a bank's profitability and efficiency. The NIM is defined as the ratio (as a percentage) of financial institutions' earnings on loans/financing and other assets minus the interest/profit paid on borrowed funds to the average amount of the assets on which it earned income in that time period.

7. The NIM of the banking sector remained high but witnessed a decreasing trend from 5.2% in 2014 to 3.7% in 2017. In 2017 the NIM was lower than Indonesia (6%), Cambodia (5.5%) and the Philippines (4.1%), but higher than Vietnam (3.6%), Thailand (3.5%), Saudi Arabia (3%), Kuwait (2.6%), Qatar (2.5%), Bahrain (2.4%), Malaysia (2.3%) and Singapore (1.9%) (Global Economy 2024g). This trend may reflect both higher income and cost reduction.

8. The banking sector on average had a comfortable lending and deposit rates spread of above 5.0 basis points in 2014–2018, contributing to improved income and profitability. In 2017 the spread was 5.1 basis points, much higher than Malaysia (1.7), the Philippines (3.7), Thailand (3.1), Indonesia (4.6), Vietnam (2.6), Qatar (1.8) and Kuwait (3.1) (Global Economy 2024f). This high spread may reflect the efficiency of the banking sector in deposit mobilisation at a low interest rate.

9. The average deposit rate of the banking sector was 0.78% in 2018 whereas the average lending rate for the household and business sectors was 6.01% and 5.87% (AMDB 2019a: Tables 11 and 12, author's computation). In order to expand the
<table><caption>**Table 5.5** Brunei Darussalam: Trends in the development of the efficiency of the banking sector, 2014–2018 (%)</caption><thead><tr><th>Indicators</th><th>2014</th><th>2015</th><th>2016</th><th>2017</th><th>2018</th></tr></thead><tbody><tr><td>Return on assets (before tax)</td><td>1.4</td><td>1.3</td><td>1.0</td><td>1.3</td><td>1.5</td></tr><tr><td>Return on equity (after tax)</td><td>10.1</td><td>8.7</td><td>6.4</td><td>8.9</td><td>11.4</td></tr><tr><td>Non-interest expense to gross income (efficiency ratio)</td><td>50.0</td><td>52.4</td><td>53.6</td><td>51.5</td><td>48.1</td></tr><tr><td>Net interest margin</td><td>5.2</td><td>3.3</td><td>2.6</td><td>3.7</td><td>NA</td></tr><tr><td>Spread between reference lending and deposit rates—basic points</td><td>5.6</td><td>5.1</td><td>5.0</td><td>5.1</td><td>5.2</td></tr></tbody></table>

Source AMBD (2019a); Knoema (2024b)

borrowers’ base and business, there is a scope for banks to narrow the spread to attract more borrowers, particularly MSMEs and low-income households.

## 5.6 Prospects, Challenges and Recommendations

This section examines the major emerging prospects and challenges faced by the banking sector in Brunei and provides recommendations to utilise the prospects and address the challenges.

### 5.6.1 Scope for Further Development in the Banking Sector

The analysis in earlier sections shows that Brunei’s banking sector development in terms of depth and efficiency has been somewhat stagnant or fluctuating for a majority of the 15 indicators in 2014–2018. The depth and efficiency of the banking sector remained below most ASEAN and GCC countries. This indicates that there is scope or prospect for further development in these areas.

In terms of financial access and financial inclusion, Brunei’s banking sector has performed better than most ASEAN and GCC countries for most indicators. The International Monetary Fund (IMF) study by Sahay et al. (2015) finds that the effect of financial sector development on economic growth is bell-shaped as it reduces at higher levels of financial development. The study is derived from a broad-based and comprehensive measure of financial sector development called the FD index. The level of financial sector development, including financial market development, had a positive impact on growth up to a certain point, namely between 0.45 and 0.7 on the
FD index and between 0.4 and 0.6 on the market index. Beyond this point, further financial sector development had a negative impact on growth. The analysis shows that the FD index of Brunei is below the optimum index value for both financial sector and financial market developments. This suggests that further development of Brunei's financial sector will have positive impact on growth (ibid.). Enhancing the depth and efficiency of the banking sector and developing efficient bond and stock markets could bring significant benefits for the country.

### 5.6.2 Enhancing Efficiency of the Banking Sector

The economy and financial sector of Brunei have unique characteristics which provide good opportunities and prospects as well as pose significant challenges. The Economic Census of Enterprises (DEPD 2016) shows that as of 2015 small enterprises accounted for 2,294 (42.9%) of a total of 5,342 active enterprises, followed by microenterprises with 1,920 (35.9%), medium enterprises with 944 (17.7%) and large enterprises with 184 (3.5%). This illustrates that the size of the private sector is small and dominated by MSMEs (96.5%). The small size of the economy, population and the private sector make it difficult for domestic companies, including banks, to exploit economies of scale. Like other major small oil-exporting countries, private sector activities remain weak while the preference for public sector employment and lack of export-oriented businesses except for oil- and gas-related businesses limit private sector growth.

In 2018 the average yields on loans/financing, offshore placements and offshore investments of the banking sector in Brunei were 5.8%, 1.8% and 3.4% (AMBD 2019a). This clearly shows that loans/financing provide the highest yield for the banking sector. Following the examples of banks in major economies in ASEAN and GCC countries, banks in Brunei, particularly domestic banks, can pursue overseas lending as well as overseas expansion as part of their strategy to achieve higher profitability, faster growth, improved funding costs and funding diversification. However, they must build capacity to effectively monitor credit risk and country risk of overseas lending, and develop a framework to mitigate these risks.

As previously discussed, Brunei's lending and deposit interest rates spread of the banking sector was much higher than several ASEAN and GCC countries. There is room to narrow the lending and deposit interest spread to attract more borrowers, particularly MSMEs, low-income households and overseas customers.

Brunei's expense to income ratio (non-interest expense to gross income) also remained higher than similar oil-exporting countries, such as Qatar, Kuwait and the UAE where bank staff costs are similar to Brunei. This implies that banks can improve efficiency through further reduction in non-interest expenses, particularly staff cost (the major portion on non-interest expenses) through appropriate strategies, such as increased automation and digitalisation.
### 5.6.3 Development of Efficient Bond and Stock Markets

Major reasons behind the Asian financial crisis in 1997–1998 included the excessive dependence of Asian economies on commercial banks for domestic financing. Corporate financing relied mainly on banks since other types of available financing, namely stock and bond markets, were still underdeveloped and quite small. During the crisis, Asian economies faced the ‘double mismatch’ issue or the ‘twin risk’ problem, namely currency and maturity mismatch risks. Corporate borrowers created these risks by borrowing short-term foreign currency loans from commercial banks, which they used to finance their long-term domestic investment in local currency. Furthermore, the 2008 global financial crisis and subsequent European debt crisis created constraints in acquiring foreign currency liquidity in the corporate sector in Asia as foreign banks withdrew their investments (Bhattacharyay 2013).

This clearly implies that the presence of an efficient stock market and secondary capital and bond markets can enhance the role of the financial sector through diversifying sources of business financing and cost-effective financial intermediation. At present, the financial sector of Brunei is dominated by banks with very low levels of financial intermediation and depth, as reflected by the low credit to GDP ratios compared to other ASEAN and GCC countries. At the same time, there is no stock exchange, secondary capital and bond market, or private sector sukuk market.

A stock exchange would promote transparency, accountability and good governance in listed companies, including banks and other financial institutions. This would also have a positive domino impact on other non-listed companies. High levels of transparency, accountability and governance would promote further economic development and enhance investors’ confidence to attract capital and technology in the long run. There is a need therefore to implement further financial sector reforms to develop a strong and efficient financial sector in Brunei.

As suggested by the IMF (2019), there are good prospects to further develop the non-bank financial sector. To reduce dependency of the business sector on the banking sector for long-term financing demand and addressing vulnerabilities arising out of maturity mismatch an efficient capital market needs to be developed. In this regard, the following reforms should be undertaken:

1. The development of an efficient interbank money market;

2. The development of a secondary bond market;

3. Creation of a market benchmark for risk-free interest rate;

4. Strengthening the primary market issuance framework for corporate bond;

5. Creation of a derivatives market.

As stated earlier, an efficient stock market could promote economic growth by diversifying access to alternative financing for businesses. Adopting best practices and international standards would facilitate interconnectivity with global markets and attract international investors. Brunei must also establish an appropriate legal and regulatory framework and building capacity for monitoring the capital markets, such as bond, stock and money markets, to maintain the stability of the financial sector.
### 5.6.4 Development of Islamic Digital Banks, Insurance/ Takaful Companies and Capital Market Services or Wealth Management Fintech Companies

The COVID-19 pandemic has modified the operating and business models of banks, particularly in terms of the provision of banking services to consumers worldwide. In this situation, many banks are utilising digital channels to offer online banking services. The financial services industry is going through a large transformation due to digitalisation, moving to the cloud, remote workplaces and the entry of digital banks and fintech companies. Recently, fintech companies have established a strong presence, using innovative technologies and business models to deliver unique and cost-effective financial services and products to customers. Some have partnered with reputed banks. These companies can enhance financial inclusion and promote MSME development and job growth by providing consumers access to banking services and funds at a low cost.

With a high mobile internet penetration rate, the ASEAN region has recently witnessed an increased presence of digital banks (which mainly deliver retail banking services through the internet or other forms of electronic channels instead of physical branches). For example, two virtual banks, ING Group and CIMB Bank, first entered the Philippines in 2019 and today there are six digital banks. Meanwhile, UOB Indonesia set up ASEAN's first digital bank, TMRW, in August 2020 and there are now a dozen such banks. The Monetary Authority of Singapore approved its first digital banking licences in late 2020—two for digital wholesale banks and two for retail digital banks—and these are now fully operational. Bank Negara Malaysia had approved five digital banking licences by 2021 (CTN News 2020; MAS 2020; Devanesan 2024). Brunei still has no digital bank.

As part of the Wawasan Brunei 2035 strategy to diversify the economy and bring innovation to different sectors, Brunei plans to develop the country as an international Islamic finance hub in niche areas. In addition, there is a plan to strengthen and improve financial infrastructure through digitalisation to promote financial sector development and new international financial linkages. The establishment of appropriate fintech companies, including digital banks and other financial services companies, can position Brunei as a centre for financial innovation in Southeast Asia. Furthermore, fintech companies can enhance financial inclusion, create jobs and increase economic growth. Fintech companies can be defined as financial services companies that use technology to transform or enable businesses in the financial sector. These companies can provide many unique benefits, particularly cost-effective lending to SMEs and ordinary users.

At this juncture, Brunei is well placed to carve out a niche for itself as an international Islamic banking centre by establishing an Islamic digital bank, Islamic insurance/takaful company, Islamic capital market services or wealth management fintech companies. In view of the small domestic market, these Islamic finance companies need to promote their products to large neighbouring markets and local markets for the scale economy and sustainable profitability.
Major challenges in developing digital banks and fintech companies include:

1. Establishment of a good framework of regulations and guidelines;

2. Appropriate and cost-effective payment infrastructure supporting fintech;

3. Appropriate and cost-effective fintech supporting ICT infrastructure;

4. Availability of appropriate talent;

5. Establishment of rules and regulations on open banking, digital know-your-customer, e-money, digital wallets and anti-money laundering.

### 5.6.5 Managing Non-financial Risk of the Banking Sector

One of the major emerging challenges facing the banking sector is managing non-financial risk. Due to the pandemic, banks and other financial institutions moved services online, staff worked from home and more customers used online products or services. This caused an escalation of cyberattacks. Banks need to strengthen their cybersecurity measures.

According to a Deloitte Insights (2018) study of international banks, respondents found their institutions very effective in managing traditional financial risk, such as market risk (92%), credit risk (89%), asset and liability risk (87%) and liquidity risk (87%). However, these banks were not very effective in managing non-financial risks, such as reputation (57%), operational (56%), business resilience (54%), cybersecurity (52%), business model (51%), conduct and culture (50%), strategic (46%), third-party (40%), geopolitical (35%) and data integrity (34%). Effective management of these non-financial risks as well as cybersecurity risk and data and IT system risk by banks and other financial institutions and their regulators in Brunei is of utmost importance.

## 5.7 Conclusion

Financial sector development plays an important role in promoting economic growth and the welfare of the citizens of a country. On the other hand, financial sector instability or vulnerability can adversely affect economic growth and cause major disruptions in the country. Even though Brunei has one of the highest standards of living in ASEAN, the country faces a major challenge arising from its high dependence on oil and natural gas, resulting in volatile government revenues and unemployment. The country needs to diversify its economy and the financial sector can play an important role in this through enhancing finance to non-oil and gas sectors in a cost-effective manner. Given these circumstances and recent vulnerability in the economy and financial sector worldwide, including in Brunei, particularly due to the COVID-19 pandemic, it is important to examine the trends in the development of the financial sector in recent years and its prospects and challenges. This chapter has therefore
examined these trends as well as its performance in terms of depth, access and effi-
ciency. Furthermore, it discusses the emerging prospects and challenges faced by the
sector.

The literature review on the role of the financial sector in economic development and financial stability shows that financial sector development can play an important role in enhancing economic growth, strengthening resilience and promoting monetary and financial stability. It can produce benefits through mobilising savings, facilitating increased information sharing and better resource allocation, and promoting diversification and management of various risks. A deep and liquid financial sector can strengthen financial stability with diverse financial instruments and assist in strengthening resilience to external and internal shocks. However, at high levels of financial sector development, there could be situations when there is 'too much easy finance', causing more costs than benefits.

In terms of policies and strategies, Brunei's government developed and imple-
mented Wawasan Brunei 2035 to turn Brunei into a dynamic and sustainable economy
with income per capita and quality of life within the top countries in the world. Finan-
cial sector development can play a significant role in achieving this. In 2016, AMBD
developed the FSBP for 2016-2025 to develop Brunei's financial sector into one of
Asia's most competitive and innovative hubs.

The effective implementation of RCEP goals together with ASEAN goals can bring increased financial integration, access, efficiency, financial inclusion and financial stability to this region, including Brunei. However, as the financial sectors become more integrated in this region, this may create increased vulnerability and instability, and the transmission of instability from one member country to another through the contagion effect.

In order to reap the maximum benefits of RCEP and address the increased
vulnerability and instability Brunei should:

1. Strengthen domestic financial market infrastructure development;

2. Extend cross-border reach;

3. Promote interoperability and standardisation of the financial institutions;

4. Enhance cybersecurity and data protection;

5. Monitor and conduct regular macro-prudential surveillance of the economy and financial sector;

6. Extend distribution channels domestically and across the region;

7. Deepen and interlink Brunei's financial sector, particularly the banking sector across the region;

8. Establish a capital market, particularly a stock market;

9. Develop cost-effective ICT and relevant infrastructure;

10. Establish hard and soft infrastructure connectivity;

11. Strengthen analytical, regulatory and compliance capabilities.

This chapter examined the trends in the financial sector in Brunei in terms of depth, access and efficiency during 2014–2018. The chapter proposes 24 indicators and analysed the performance of the financial sector of Brunei in comparison with its ASEAN and GCC peers. The analysis of these indicators shows that the performance
of Brunei in terms of access to banks and financial inclusion was, on average, signif-
icantly better than its most peers among the ASEAN and GCC countries. On the
other hand, with respect to depth and intermediation, the performance of Brunei was
lower throughout the study period compared to most ASEAN and GCC countries.
Banking sector development in terms of depth and efficiency, on average, has been
somewhat stagnant or fluctuating for a majority of 15 indicators during 2014–2018.
The efficiency of the banking sector, on average, remained at a moderate level with
most indicators lower compared to several ASEAN and GCC peers.

This analysis indicates that there is an opportunity for further development of the
financial sector. This can be achieved through enhancing the depth and efficiency of
the banking sector as well as the development of efficient bond and stock markets.
This could bring significant benefits for the business sector which in turn can enhance
growth.

This chapter also examined the major emerging prospects and challenges faced
by Brunei's financial sector and proposes the following recommendations to address
the issues for bring significant benefits to the country:

1. Opportunities for further development in the banking sector, particularly in terms of enhancing the depth, access and financial inclusion with a positive impact on its economic growth;

2. Strengthening the efficiency of the banking sector;

3. Establishment of efficient bond and stock markets for developing a non-bank financial sector in order to reduce the dependency of the business sector on the banking sector for long-term financing demand as well as addressing vulnerabilities arising out of maturity mismatch;

4. Development of innovative and cost-effective financial services including Islamic digital banks, insurance/takaful companies and capital market services or wealth and management fintech companies;

5. Managing the non-financial risk of the banking sector by banks and other financial institutions and their regulators, particularly cybersecurity risks and data and IT system risks.

Lastly, at this juncture Brunei could carve out a niche for itself as an international
Islamic banking centre through developing innovative financial services, such as
establishing an Islamic digital bank; Islamic insurance/takaful company and Islamic
capital market services or wealth management fintech companies. Given the small
domestic market, these Islamic finance companies need to promote their products to
large neighbouring markets in addition to the local markets for the scale economy
and sustainable profitability.

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Biswa Nath Bhattacharyay is an international consultant with the Asian Development Bank, a Distinguished Professor at the Faculty of Economics and Business, Lambung Mangkurat University, Banjarmasin, Indonesia and the ABBS School of Management, India, an adviser and Professor at Global Humanistic University, Anguilla, and a Fellow of CESifo, University of Munich, Germany. He was the former adviser of the Asian Development Bank, Qatar Central Bank and Brunei Darussalam Central Bank. He holds a PhD from Iowa State University, USA. His research interests include international, inclusive and sustainable development; international trade, finance and economics; financial economics, business and strategic management; bond and capital market and financial sector development, surveillance and regulation; infrastructure connectivity, management and financing; and central and commercial banking and finance. He is on the editorial board of several international journals and has contributed widely to books and book chapters, international journals and consultancy projects. He is the principal author of *ASEAN, PRC, and India: The great transformation* (2014); principal author and coeditor of *Infrastructure for pan-Asian connectivity* (2012); and author of *Determinants of bond market development in Asia. Journal of Asian Economies* 24 (2013).
**Open Access** This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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<figure><img src="image_47.png" /></figure>
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Chapter 6

Examining Brunei Darussalam's Exports
amid Developments in Global Value
Chains

Angelo Jose B. Lumba, Mahinthan Joseph Mariasingham,
and Arushi Gupta

**Abstract** In recent years, the architecture of production has developed into a vast network of interconnected processes known as global value chains (GVCs). Under this configuration, tasks and activities involved in producing goods and services are shared among participating businesses, making entry into complex production processes more feasible for certain economies. This chapter explores the evolution of Brunei Darussalam's participation in GVCs through a comprehensive analysis rooted in the input-output framework. Through an exhaustive decomposition of gross exports at the sectoral level using the Asian Development Bank's multiregional input-output database, the study reveals that the heavy reliance of Brunei on the oil and gas industry for international trade has led to limitations in its position within GVCs. While the short-term trade balance is likely to benefit from global oil price increases amid post-COVID pandemic recovery and geopolitical events, such as the Russian invasion of Ukraine, Brunei faces an imminent need for economic structural transformation. The intrinsic volatility of oil prices and the exhaustion of reserves necessitate diversification efforts to sustain long-term economic growth and stability.

**Keywords** Brunei Darussalam · Global value chain · Multiregional input–output database · Post-pandemic recovery · Russian invasion of Ukraine · Structural transformation · Diversification

<footnote>A.J.B. Lumba (✉) · M.J. Mariasingham · A. Gupta
Asian Development Bank, Manila, Philippines
e-mail: alumba.consultant@adb.org</footnote>

<footnote>M.J. Mariasingham
e-mail: mmariasingham@adb.org</footnote>

<footnote>A. Gupta
e-mail: agupta4.consultant@adb.org</footnote>
## 6.1 Introduction

The advent of global value chains (GVCs) has changed the shape of the global economy in the last 50 years. Today, most products are manufactured in production chains and assembly lines spread across multiple economies, with each step adding value to the product before it ends up with the final consumer. Amid increasing globalisation, competitive pricing and the drive to optimise production processes, the concept of GVCs has been amalgamated into mainstream trade-related nomenclature and is understood as a type of production arrangement wherein different firms in different territories undertake various stages of production of goods and services. GVCs integrate the technical knowledge and comparative advantage of offshore firms, which could ultimately drive economic productivity and create employment opportunities.

The COVID-19 pandemic severely impacted on GVCs and, by extension, the world economy. As governments scrambled in the face of the health crisis and introduced stringent lockdowns as containment strategies, the ensuing supply chain disruptions and changes in consumer behaviour transformed existing production-sharing networks globally. In 2022, just as recovery from profound adverse impacts was underway, the Russian invasion of Ukraine further crippled GVCs by disrupting the movement of essential commodities. Amid a high reliance on Russian and Ukrainian exports of commodities such as oil, agricultural products and minerals, especially in Europe, the ongoing conflict has not only resulted in logistical impediments to supply chains but has also exerted severe inflationary pressure on the global economy. While economic recovery from the pandemic and the resulting increase in demand had already led to a rise in the price of crude oil per barrel in the global market—from around USD50 per barrel in January 2021 to USD70 per barrel in December 2021—the price further skyrocketed to over USD110 per barrel in March 2022 because of the Russian invasion (EIA 2024).

These consecutive global shocks have unveiled vulnerabilities in GVCs and underscored the importance of integrating resilience to safeguard against future risks. In this milieu, new and innovative approaches that leverage digitisation and the power of novel tools, such as machine learning and artificial intelligence, are emerging as the next phase of the GVC revolution. However, a prerequisite for integrating robust risk management frameworks in production processes is to evaluate the scope of GVC integration in an economy for various upstream and downstream industries.

Brunei Darussalam is one such economy where the government is actively exploring new avenues for GVC integration. In the current scenario, the economy of Brunei remains heavily dependent on the oil and gas industry. An increase in GVC participation for the country is contingent upon its ability to build capacity and infrastructure to foster non-oil and gas industries at globally competitive prices while also creating a conducive policy environment that enables the same. This chapter explores the integration of GVCs in Brunei by showcasing some evolving trade patterns of its economy and sectors. It utilises measures of different dimensions
of GVCs that were derived from cutting-edge accounting frameworks and analyses
Brunei's current position in GVCs, particularly its nexus with its official trade blocs.

To this end, this chapter utilises data from the multiregional input-output (MRIO) database of the Asian Development Bank, which provides a collection of time series inter-economy input-output tables that contain information on cross-sector linkages for 62 economies, including a residual 'rest of the world' entity to capture the entirety of global flows (ADB 2023). The MRIO database is an extended version of the 2013 world input-output database. Each economy is divided into 35 sectors, based on Table A2 of Marcel P. Timmer et al. (2015). These input-output tables record intersectoral transactions of goods and services for 'intermediate use', along with the output produced by each sector to meet final demand. The MRIO database records five final demand categories: household final consumption expenditure (FCE), non-profit institutions serving household FCE, government FCE, gross fixed capital formation and changes in inventories. The database is available for the years 2000 and 2007–2023. More details on this database are available in Appendix A1.

## 6.2 Framework

Extensive research on GVCs in the recent past has led to the proliferation of a host of competing frameworks to study and measure the same (see Inomata 2017). Previous attempts to extract GVC-related quantities from exports include David Hummels et al. (2001) and Robert Johnson and Guillermo Noguera (2012), but it was Robert Koopman et al. (2014) who first proposed a framework for exhaustively decomposing exports at the economy level. This was subsequently extended to the sector level by Zhi Wang et al. (2013, revised 2018). Using this framework, Mahinthan Joseph Mariasingham et al. (2020) analysed GVC trends in Brunei, Singapore and Malaysia. Further refinements have since been introduced by Alessandro Borin and Michele Mancini (2019), offering a more precise and consistent measure of GVC indicators in value-added terms.

It is also important to understand the rationale behind measuring trade flows
in value-added terms. As a simple example, consider that economy A exports
vehicle parts, for which the domestic manufacturers utilise aluminium imported
from economy B. In this case, a significant proportion of the revenue from selling
the automobile parts may actually accrue in economy B to reflect the purchases of
aluminium, thereby leaving only marginal profits for economy A. If this trade flow
was to be measured in gross terms, it would imply that the original value of aluminium
is counted twice—once in exports of economy B's aluminium output to economy
A, and further as the value of aluminium embedded in economy A's gross exports
of automobile parts. Therefore, simply accounting for gross exports may misrep-
resent the domestic national income or its components, such as profits, wages and
employment. To this end, a decomposition of exports based on value added corrects
for double counting, while also providing a measurement framework that accounts
for the fragmentation of production processes in today's economic climate.
<figure><img src="image_49.png" /><figcaption>**Fig. 6.1** Value-added accounting framework. *Source* Borin and Mancini (2019)</figcaption></figure>

Figure 6.1 shows the main categories in the value-added accounting framework using the methodology in ADB (2022). Data from MRIO tables are used to decompose export flows into value-added categories.

Gross exports are decomposed into three main categories: domestic value added (DVA), foreign value added (FVA) and pure double-counting (PDC). DVA accounts for those exports whose value added originated domestically, FVA accounts for those that originated from foreign sources, while PDC refers to duplicated recordings of the same value added, crossing the same border more than once. DVA is further decomposed into three categories: DAVAX, REX and REF. DAVAX accounts for exports of DVA that are directly absorbed by the importer. It will be useful to subdivide this into DAVAX1 and DAVAX2, corresponding to exports of final goods and exports of intermediates, respectively. REX and REF are exports of DVA that are re-exported by the importer, to eventually be absorbed abroad (REX) or returned to and absorbed by the exporter (REF). FVA is value added embedded in exports, arising from the use of imported inputs. (See Appendix A2 for details on the subcategories of REX, REF and PDC.) The levels, shares and trends of each of these categories provide insights into an economy's engagement with GVCs.

Among these categories, not all components prescribe to GVC-related trade. DAVAX is a measure of the output produced domestically and consumed abroad—either in the form of final consumption or as intermediate inputs used by the importing economy to produce final goods for its internal market. In essence, DAVAX identifies the ‘traditional’ type of trade, as opposed to international shipments that take place under complex production sharing arrangements or GVC-related trade. Simply put, GVC-related trade includes all traded items that cross at least two international
borders, meaning they are re-exported at least once before being absorbed in final demand (Borin and Mancini 2019).

## 6.3 Measuring GVC Indicators for Brunei

### 6.3.1 Value-added Decomposition of Gross Exports

Brunei's gross exports from 2000 and 2007–2021 can be decomposed into the five categories of value-added components (Fig. 6.2). The trend of Brunei's total gross exports shows a decline of about 30% from USD11.2 billion in 2008 to USD7.8 billion in 2009 as the economy experienced the impact of the global financial crises in the form of a fall in demand for its exports, particularly in the energy sector. While exports recovered noticeably in 2011–2014, the expansion of exports was short-lived as the global economy reached the cusp of the largest oil price decline between mid-2014 and early 2016. The 70% price drop during that period was one of the three biggest declines since the Second World War, and the longest lasting since the supply-driven collapse of 1986 (Stocker et al. 2018). Although exports have been on a gradual path of recovery since 2017, not only have they not reached the pre-crisis levels but they even declined since the onset of the COVID-19 crisis in 2020. However, as the pandemic seemingly receded and demand increased across the globe, fuel prices started to rise, particularly since the Russian invasion of Ukraine in February 2022, which potentially created a favourable scenario for Brunei's exports.

<figure><img src="image_50.png" /><figcaption>**Fig. 6.2** Brunei Darussalam: Decomposition of exports into value-added categories, 2000, 2007–2021 (USD billion). *Source* ADB (2022, 2023) and ADB estimates. *Note* Gross exports are decomposed using the methodology in Borin and Mancini (2019). Data labels shown (%) refer to the DAVAX share in the total exports</figcaption></figure>