Brunei's economy grew by 2.4 per cent in 2024, with similar growth projected for 2025, driven by a rebound in the oil-and-gas sector (O&G) and an expansion in non-O&G sectors. To continue on its track to sustainable growth using economic diversification, Brunei needs to focus on sectors with high comparative advantages and implement supportive policy and structural reforms.
Brunei’s economy grew stronger in 2024 at 4.2 per cent and is projected to grow at a similar rate in 2025. The key drivers of this growth are the continuing expansion in non-oil-and-gas (non-O&G) and the rebound of the O&G sector. Yet achieving sustained economic growth will require strategic diversification and structural change.
Non-O&G sectoral expansion was driven mainly by service sectors including tourism, transport and business, as well as downstream activities which accounted for 17 per cent of GDP. The manufacture of liquefied natural gas and other petrochemical related industries dominated downstream activities. The strong rebound in the upstream O&G sector can be attributed to the commencement of operations at newly discovered oilfields in late 2023, coupled with less maintenance-caused disruption in O&G production.
This robust growth has reduced Brunei’s fiscal deficit and increased fiscal capacity, allowing for further growth-oriented fiscal consolidation. Advancing fiscal reforms could further improve fiscal outlooks while strengthening rule-based fiscal frameworks. Key measures include rationalising government expenditure, broadening the tax base — for example through the anticipated introduction of carbon pricing in 2025 — enhancing the mobilisation of non-O&G tax revenue and digitalising the tax system. These are expected to promote fiscal diversification and, in part, lower fiscal volatility.
Brunei’s economy is heavily reliant on upstream and downstream O&G activities. While the share of upstream O&G exports has declined, this has been largely offset by the growth in O&G and chemical-related products since Hengyi Industries commenced operations in 2019. The non-O&G private sector, excluding downstream activities, remains relatively small across both tradable and non-tradable sub-sectors. For instance, agriculture contributes only about 1 per cent to GDP, while the service sector accounts for 38 per cent, consisting mainly of minor sub-sectors that generally contribute just 1–3 per cent each.
The ongoing economic diversification efforts and structural reforms are expected to continue driving growth in the non-O&G sector. The ensuing macroeconomic and financial stability observed in 2024, bolstered by the long-standing currency board arrangement with Singapore where both countries accept and exchange each other’s currencies at par and without charge, supports this momentum. Key growth sectors include downstream O&G, food, tourism, technology and services.
While deepening economic diversification is the conventional solution to the challenges of high O&G-dependent economies like Brunei, 2023 research suggests that strategic diversification would be more effective. This involves focusing on specific sectors where Brunei has high revealed comparative advantage, alongside enhancing export product diversification and specialisation in existing key sectors. Diversification into sectors with low revealed comparative advantage is costly and difficult to sustain due to inadequate infrastructure, insufficient expertise and complications arising from existing barriers like subsidies and protectionist policies. Plus, products in such sectors are often less competitive in international markets.
Prioritising downstream O&G petrochemical and related industries — such as the Phase 2 expansion of Hengyi Industries, Brunei Methanol Company and Brunei Fertiliser Industries — is essential for shifting exports away from heavy reliance on crude oil and gas towards more diverse and sophisticated higher value-added export products.
Brunei has already achieved notable progress in these downstream sectors. From 2010 to 2022, the share of fuel exports declined from 95.2 per cent to 80 per cent, while chemical products grew from just 1 per cent to 17.5 per cent. Further efforts to attract more foreign direct investment into downstream industries and related sectors are critical to improve export diversification and upgrading.
Besides petroleum, a 2022 International Monetary Fund study identified 55 export products where Brunei has high revealed comparative advantage. Most identified products fall under the categories ‘chemicals and related products’, ‘food’ and ‘machinery and transport equipment’. Many of these non-O&G export industrial products have yet to feature prominently in Brunei’s export portfolio, demonstrating significant growth and development potential.
Lucrative exports include chemical products derived from acyclic hydrocarbons, nitrogenous fertilisers and halogenated hydrocarbons. Strategically diversifying into these products for export is both profitable and sustainable. Brunei already possesses a high level of specialisation and complexity in their production and export. These products share strong export relatedness with products such as ammonia, which has the highest export potential among Brunei’s chemical exports.
But achieving full growth potential would require structural and policy reforms, such as implementing skill-based labour and industrial policies and investing in human capital and digital infrastructure. Similar reforms and structural transformations have successfully facilitated economic diversification in other Gulf Cooperation Council countries like the United Arab Emirates.
Brunei has also been pursuing reforms aimed at leveraging digital transformation to establish a robust digital ecosystem and harness AI adoption. At the same time, it seeks to mitigate labour market displacement risks, promote financial sector stability and enhance its long-term commitment to green and renewable energy transition. These efforts could pave the way for ventures into high-growth renewable industries, such as renewable electricity and hydrogen production and export. But Brunei must first address the gaps in structural reforms, particularly first-generation reforms, by strengthening trade facilitation and advancing regulatory and governance frameworks.
Economic and export diversification require supportive policy reforms and structural transformations. These measures often take time to yield results, with benefits typically realised over the long term. Looking ahead, if Brunei can implement reforms and focus on targeting diversification into non-O&G with high revealed comparative advantage industries, it will pursue a more effective and sustainable path to economic growth.
Source: East Asia Forum
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<p>Time: 2024 By: Ministry of Industry and Trade</p>
