Brunei Economic Factors - Assignment Example

Finance and Accounting submitted BRUNEI ECONOMIC FACTORS Size of external debt: What is the size of the external debt and the related interest payments (debt service)? If a country has a large stock of external debt, its monthly debt service may be burdensome to the point where the government may not be able to take good care of its citizens since most of its revenue would be spent on servicing its external debt. Let us understand first the meaning of debt service. Debt service is a measure used by financial lenders as assessment whether the borrower is already in too much debt. As a rule, a ratio of less than 40% means borrower has an acceptable level of debt (Investopedia). Brunei is a small country that derives its income from oil and natural gas production, from overseas investments and domestic production. It has a population of 422,675 as of July 2014. Crude oil and natural gas accounts for 90% of its exports. Because of its vast natural resource that supports its economy, this country has no external debt. From 2000 to 2012 Brunei has no record of external debt, but instead draws a budget surplus of 9.8% of GDP in 2013 (CIA World Fact Book, Economy 2014). The country’s GDP as of 2013 is $22.25 billion. Government revenues represent 53.8% of its GDP while its spending is 33.3% of its GDP, thus the government has a surplus and has no government debt. Exchange rate is 1.25 BND per 1 USD. (Quandl.com. 2014) . Brunei’s GDP is considered as one of the highest in Asia. 2. Structure of the current account: What is the trade balance of your country? Does it have a trade surplus, or trade deficit, and if so, why? Records of Brunei Economic Bulletin (2008) showed a 0.6% GDP growth on a year to year basis. In comparison, there is a 4.4% slow growth between 2007 and 2006 due to the low production of oil and gas sector. The energy sector, that accounts for two-third of Brunei’s economy contracted in 2007 due to lower gas production. The cut down in oil production was a result of overproduction in 2006, so it was necessary for the government to curtail production to protect oil wells (Brunei Economic Bulletin, 2008). Trade balance is described as the difference between a country’s imports and its exports. It is the largest component of country’s balance of payments, (Investopedia). A country has a trade deficit if it imports more than it exports. Total exports of Brunei for 2011 was $12.75 billion, while total imports for the same year was $3.02 billion.(CIA World Factbook, economy). Clearly, trade balance is in favor of Brunei which is 874 million BND. Current Account balance as of 2014 is 2812.70 BND million; Current account as a percentage of GDP is 43%. From 2005 to 2014, average balance of trade is BND 1253.93 million, with an all time high of BND 2971.45 million in September 2008 and a record low of BND 401 million in 2013.(Trading Economics, 2014). In 2007, government spending of Brunei totaled BND 5,791.2 million against total government revenue of BND 8,784.8 million giving a surplus of BND2,993.6 million. This surplus is lower compared to its 2006 surplus of BND 4,337.9 million. The lower surplus is caused by the decline in government’s tax revenues particularly from oil and gas and the heavy expenditures.(Brunei Economic Bulletin, 2008) 3. Resource endowment, level of development and economic diversification. What natural resources does the country have, that it can export to earn hard currencies? And what is its level of development as classified by the World Bank (low-income, middle income, or an upper income economy), and how diversified is its economy? The World Bank has classified Brunei in the high income level country because of its high GDP of $22.25 as of 2013 (World Bank, 2014). Aside from WB, Brunei has been recognized by the World Economic Forum 2009-2010 survey on global competitiveness as 32nd out of 133 countries surveyed. The country was also judged by the same institution as first in macro-economic stability in the world ( Brunei Economic Bulletin…p. 39). Another survey in 2008 done by the United Nations on Human Development Index ranked it as 27th in the world and the first in ASEAN countries. These rankings mirror the efforts done by the government in investing in the well-being of the people. Brunei, aside from gas, derive its income from investments abroad and from domestic production. It has a diversified non-energy sector that accounts for 9.5% growth that has protected the economy from contracting (Brunei Economic Bulletin, May 2008). Natural resources aside from gas, that could be exported to earn currencies are jewelry, scrap iron, diamonds and excavation machinery. Its export partners are Japan, South Korea, Australia, India, New Zealand, and Vietnam. It imports iron and steel, motor vehicles, machinery and transport equipment, manufactured goods, food and chemicals from Singapore, China, and Malaysia, its import trading partners. In the domestic front, the non oil and gas sector has contributed to Brunei’s growth and has supported its economy from further contracting in 2007.(Brunei Economic Bulletin, 2008, p. 4) This sector is comprised of the agriculture sector of vegetables, fishery, fruits, livestock, and forestry . The vegetable, fruits and other agriculture sector grew by 4% in 2007 a change from a negative growth of 12.8 percent in 2006. The growth was augmented by the production of cut flowers, ornamental horticultures and fruits. A mild growth in 2007 is seen in livestock and poultry sector, particularly in cattle raising and in chicken broilers production. Meanwhile there were contractions of growth in forestry, fishery, and other sectors. The forestry sector saw a contraction of growth in 2007. The increase of production in timber was offset by the contraction in the production of bakau poles. In 2006, the fishery sector’s growth contracted by 23.8 percent and continued to decline by 12. 6 percent in 2006. The decline of this sector was saved by aqua-culture growth , particularly fish in cages and fresh water fish. Other sectors like the non-oil and gas manufacturing also contracted. There was a poor performance in the textile and apparel sector. As a consequence of decline of exports and worldwide economic crisis, finance sector, hotels and restaurants fell, as well as private sectors related, all in 2007. To combat this decline in the financial sector, the government issued policies to encourage more foreign investments in the banking industry. For one, it has suggested to the banks to create market for Halal products for the Muslims around the world. Considered as the most important event for Islamic banks in 2009, is the giving it a chance to finance the processing of Brunei’s own Halal brands (Brunei Economic Bulletin,2009, p. 52, pdf.). Aside from the above, the government is also taking measures to attract international insurers and to place their businesses here both for domestic and international purposes. The government believes that the country’s financial and legal stability and credibility will be the key reasons for its being chosen as an offshore destination, aside from operating as an Islamic banking scheme. Its participation in the banking system has outpaced conventional banks. It is also said to be higher than its banking counterparts that promotes Islamic financial services in Bahrain, UAE, Qatar, and Saudi Arabia. (Brunei Economic Development p..53, pdf). Meanwhile, a positive sign of growth was seen in the construction, in the wholesale and retail sections, and in the communication and transport. 3. Size and composition of savings and investment. This section is referring to household savings rate in the country. Household’s savings is defined as the “difference between a household disposable income (that is, wages received, income of self-employed and net property income) and its consumption (expenditures on goods and services)” (Aridas, Tina, et. al, 2010). The great recession in 2009 taught people to save so that household savings increased in many countries. However, there is a dearth of information on household’s savings rate for Brunei. Only the household consumption and income of Brunei appear in several reports that showed a 10% share on GDP (CIA Worldfacts, economy). GDP of Brunei as of 2013 stands at $22.25 billion. On the other hand, a mandatory retirement savings scheme called Tabung Amanah Pekerja (TAP) set up in 1993 enjoined all public and private sector employees to contribute 3.5 % from the members’ monthly salary while the employer is required to contribute at the same rate. The total monthly rate of contribution is 7%. Minimum monthly member payment is B$17.50 and the same goes to employer, or a total of B$35. The TAP member, upon reaching retirement age of 60 years, is paid an annual defined dividend. If the employee dies before retirement, the beneficiary receives the annuity. TAPS allows withdrawals of benefits from the funds, thus reducing the amount of pension funds. And in many cases, as observed by the TAP management, very little is left for retirement purposes. So at this instant, the government believes there is a need to add a safety net to protect members. In other cases wherein an employee is not able to make sufficient contribution before reaching age of retirement, the government subsidizes his/her shortages to make it on an equal footing. A government trust fund is specifically designed for this purpose. Recently, a savings culture is being developed by the government to its people through its BiBD campaign. This starts by educating the people to save three or four months of their income to be used in case of emergency. There is also a need to establish a goal or purpose for this savings. The plan encourages employees to start saving as soon as they got their first jobs. (Brunei Economic Bulletin...p.55) Another development that pertains to savings culture is the change in the risk perspective ( Brunei Economic Bulletin, 2008, p.46 ). Accordingly, Financial Analysts from the Standard Chartered Bank in Brunei saw a repatriation of deposits abroad of wealthy individuals and have considered home as a safe haven for their deposits. The BEB cited IMF report that stated half of bank deposits on the Bruneians are placed outside the Sultanate, but because of the economic crisis worldwide, they are beginning to alter their depositories, the most visible of which is the decline of market share of deposits held by Islamic banks and the change to conventional banks. Because of this environmental change, government is now aware of bank’s financial health, such as looking at their balance sheets, risk management procedures and requirements. Works cited Aridas,Tina & Pasqual, Valentina. Household Saving Rates. Global Finance. GF Mag.com 2014 Brunei Economic Bulletin, 2008 Vol. 5, 2007 Special Edition Brunei Darussalam Economic Review Outlook and Recent Economic Development, pdf, web. 27 May 2014 Web. 28 May 2014 CIA World Factbook. Brunei Darussalem. Economy. 2014. Web. 28 May 2014. Investopedia. Debt service. Definition. Web. 28 May 2014 …. Trade Balance, Definition. Quandl.com. Brunei Economy Data. 2014. Web. May 28, 2014 Trading Economics. Brunei Balance of Trade, 2014. Web. 28 May 2014. World Bank. Brunei Darussalem Data. 2014. Web. 28 may, 2014. Read More