Oil and gas sector on balance of payments of brunei darussalam

Oil and Gas Sector on Balance of Payments of Brunei Darussalam Saiful Islam Universiti Teknologi Brunei, Brunei Abstract Empirical studies show that oil price is an important determinant of trade balance of oil exporting and importing countries In this study we examine the relationship for Brunei Darussalam, using combined oil and gas price, instead of oil price only The justification for combining oil and gas (LNG) price into a single measure is LNG exports are larger than crude oil exports of Brunei in recent years, and on average, crude oil export is 50 percent and LNG export is also 50 percent since 1991 Using a combined oil and gas price a single equation regression model is tested with Brunei data for the period 1991 to 2017 Specifically, we regress trade balance on the combined oil and gas price variable The results show that combined oil and gas price has a sizeable impact on the trade balance of Brunei A one percent increase in the oil and gas price causes the trade surplus to rise by more than percent (1.3332%) These results suggest some policy implications for policy makers of Brunei to reduce effects of lower oil and gas prices Keywords: Trade balance; oil price; LNG price; combined oil and LNG price; Brunei Darussalam JEL Codes: F14, F32, Q43 1.Introduction From national income accounting, the gross domestic product is equal to the sum of consumption, investment, government spending and net exports, or GDP = C + I+ G +NX Net exports (NX) are one key measure of transactions of a nation with other countries, a principal link between GDP of a country and development in the rest of the world (Boyes and Melvin, 2016, p 103) Trade in goods, services, and financial assets give the balance of payments statistics of a country Through these international transactions, a country affects and is affected by the economies of other nations Brunei Darussalam (hereafter Brunei) is a net exporter of oil and gas The prices of these two commodities are an important factor of trade balance and current account developments Prices of exported oil and gas are very closely linked to those of world oil and gas The importance of this trend on the trade balance has strengthened in recent years due to the oil price fluctuations in global markets Empirical studies (see for example, Huntington, 2015) find that net oil exports are a significant factor in explaining current account surpluses The objectives of this study are: 1) to see how has oil and gas trade functioned in the balance of payments of Brunei; and 2) to assess the impact of the fluctuations in oil and gas price on the trade balance of Brunei The motivation of this study comes from the virtual neglect of Brunei from most published economic studies For example, the studies undertaken on the effect of oil price fluctuations on oil exporting countries by Kitous et al (2016) and Rafiq et al (2016) neglected Brunei, due to apparent data unavailability Therefore, it is hoped that this study will contribute towards filling some of the gaps in the economic literature concerning economic impact of oil and gas prices on Brunei Brunei, as the small oil-exporting country of less than half a million people, is frequently among the wealthiest nations in the world, with a GDP per capita of international dollar 79,508 (see Table 1) This table also shows that export of mineral products (mostly oil and gas) of Brunei is 93 percent of its total exports The corresponding figures for other major exporters of mineral products are 25 percent for Indonesia and 17 percent for Malaysia (see Table 1) Table 1: Basic Data for Brunei and Other ASEAN Countries in 2015 Populatio n (million) Brunei Cambodia 0.4 15.1 Indonesia 255.50 Lao PDR Malaysia 6.8 31.0 Myanmar Philippines 50.2 100.98 Singapore 5.5 65.7 Thailand Nominal GDP (US$ billion) GDP per capita at PPP (current international $) 12.9 17.7 79,507.61 858.9 12.5 11,148.54 296.2 62.8 26,211.19 292.4 292.7 395.2 191.4 3,498.26 5,351.46 5,479.88 7,282.27 85,382.00 Export of mineral products (% of total exports) 4 16,130.09 Vietnam 91.7 6,036.60 Source: OECD (2017), Economic Outlook for Southeast Asia, China and India 2017: Addressing Energy Challenges, OECD Publishing, Paris http://dx.doi.org/10.1787/saeohttp://dx.doi.org/10.1787/saeo-2017en2017-en Citizens of Brunei also enjoy no sales or personal income tax, as well as high social welfare on par with many developed countries However, record low oil prices since 2014 have exposed the weaknesses of a resource-dependent economy GDP of Brunei contracted both in 2014 and 2015, despite the best efforts of the government to mitigate the impact of falling oil revenues (OECD, 2017, p 203) Brunei with a dominant share of oil and gas (93%) in its export revenues is also highly dependent on oil and gas regarding government revenues and GDP Contributions of oil and gas are 53 percent to gross domestic product (GDP) and 70 percent to government revenue of Brunei As Brunei is very dependent upon trade the country is likely to be affected by the fluctuations in oil and gas prices 2.Resource Base of the Brunei Economy Resource base of the Brunei economy is dominated by its large oil and natural gas reserves, both onshore and offshore in the South China Sea There are few other known resources, with primary and secondary rainforest covering approximately 80 percent of landmass of Brunei The country also has small resources of carbonate rocks, coal, kaolin, sand and gravel, and silica sand (Tse, 2015) Since the discovery of the first oil field in 1929, oil and gas are the backbone of the Brunei economy Despite the decline over the years, its contribution to GDP was 48.8 percent in 2017 While in the latter half of 1980s, oil production was pegged at around 150,000 barrels per day, production of oil has often fluctuated with price of oil in the international markets It peaked at 219 thousand barrels per day in 2006 and stood at 121 thousand barrels per day in 2016 (Brunei Government 2017) The country is also rich in natural gas production In 2016, it produced 243 thousand barrel of oil equivalent per day Including the manufacture of LNG and methanol of 14.8 percent, the contribution of oil and gas sector in GDP was 63.6 percent in 2017 (see Table 2) Table 2: Share of Production of Resource Products, 2005 to 2016 (Percent of GDP) Year 200 200 Agriculture Forestry 0.0 200 200 0.0 200 201 0.0 201 201 0.1 201 201 4 0.1 201 201 0.2 201 0.0 0.0 0.0 0.1 0.2 0.2 0.1 Fishery Oil & gas mining 55 59 57 57 47 50 53 53 50 49 43 41 48 Sources: Brunei Government, Brunei Darussalam Statistical Yearbook 2008, 2011 and 2016 editions Data for 2017 are obtained from Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam By contrast, the contribution of agricultural products to GDP is insignificant (between 0.4 and 0.6%) over the period from 2005 to 2017 The country has to import 80 percent of its food requirements Although land, finance and irrigation are all available and the government has established model farms to train potential farmers, the scarcity of labor has failed to increase agricultural output and achieve even a very modest target for rice production, 18 percent of the total requirement (Siddiqui and Al Athmay 2012) Also seen in Table 2, share of forests to GDP is very negligible Forests are considered most permanent assets of Brunei About 81 percent of total land area of 5765 square kilometers is covered with diverse forest Unlike the other neighboring countries, forests have not been fully exploited for timber and other commercial uses due to the availability of revenue from oil and gas resources Share of fishery production is also insignificant (0.2 to 0.5 percent) Although Brunei has one of the highest consumption of sea food, and a sizeable potential, its total annual see food production was only 1,726 tones which is short of its local needs (Siddiqui and Al Athmay 2012) 3.Balance of Payments Performance of Brunei Brunei is an open economy that depends heavily on the outside world This is evident from the following facts: The percentage of exports to GDP is currently 45 percent Oil and gas exports contribute 90 percent of total exports Imports constitute 25 percent of GDP Brunei imports most of its needs of consumer goods from Malaysia (21.3%), Singapore (14.3%), and China (11.6%) The labor force in Brunei consists mainly of expatriate labor Most economic activities in Brunei revolve around the oil and gas sector Prices of oil and gas have fluctuated sharply since 2001 with significant impact on the balance of payments of Brunei 3.1 Fluctuations in Oil and Gas Export Prices for Brunei The trend in oil and LNG export prices for Brunei during the period 2000-2017 is presented in Figure Production of oil in Brunei has often fluctuated with price of oil in the international market We will find the impact of fluctuations in oil prices on the main components of balance of payments of Brunei For this reason, it is important to see the trends in oil prices for Brunei Figure 1: Export prices of oil and LNG for Brunei, 2000 to 2017 (Index 2000=100) 450 400 350 300 250 I 200 ndex 150 100 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Oil price LNG price From Figure 1, in 2001, a barrel of crude oil sold for US$24.70 per barrel (index 83.2) It increased to $69.59 per barrel in 2006 (index 234.3), then skyrocketed to $100.99 per barrel in 2008 It increased to $117.45 in 2012, then decreased to $43.63 in 2016 Export price of oil for Brunei was US$55.93 per barrel in 2017 The export price of LNG for Brunei also shows similar pattern The sharp drop in oil and LNG prices poses many challenges for Brunei including reduced export revenues Monthly fluctuations of export prices of oil for Brunei are shown in Figure for June 2014 to April 2017 Source: Based on data from Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam The decrease in oil prices affected the economy of oil exporting countries in terms of reduced export revenues This is bad news for oil exporters, including Brunei In contrast, 53 falling oil prices is good news for oil importing countries, in terms of reducing transport and other business costs Fluctuations in oil prices have 53 significant effect on balance of payments for oil exporters and oil importers Oil importers usually benefit from a falling oil price because the value of their oil imports drop This reduces the current account deficit of oil importers However, for oil exporters, a falling oil price will the opposite reducing the value of their exports and causing lower trade surplus Brunei is a major exporter of oil and gas, so will have a significant impact on current account of Brunei 3.2.Balance of Payments Performance The balance of payments statistics of Brunei are presented in Table Table 3: Balance of Payments of Brunei, 2008 to 2017 (in millions of U.S dollars) 2008 Export of goods 2010 2012 2014 2016 2017 10,449 8,799 12,881 11,149 5,120 5,475 10,217 8,364 12,328 9,604 n.a n.a Import of goods 2,566 2,568 4,116 3,670 2,659 3,070 Trade balance 7,883 6,232 8,765 7,479 2,461 2,405 Services balance -641 -807 -2,156 -955 -1,114 -697 Income balance -288 -409 -926 -1,065 418 315 Current account balance 6,953 5,016 5,683 5,459 1,766 2,023 Net direct investment flows -328 -480 -859 -575 -150 n.a 88 866 565 771 624 n.a 2,721 4,457 3,055 4,181 5,238 n.a 84 76 703 246 171 n.a 11,411 Oil & gas exports Net portfolio investment flows Net other investment Change in international reserves GDP 16,005 13,707 19,048 17,122 12,163 Oil & gas exports to export of goods Export of goods to GDP 97.7 95.1 95.7 86.1 - - 65.3 64.2 67.6 65.1 44.9 45.01 Import of goods to GDP 16.0 18.7 21.6 21.4 23.3 25.2 Import of goods to exports of goods Trade balance to GDP 24.6 29.2 31.9 32.9 51.9 56.1 49.3 45.5 46.0 43.7 21.6 19.8 Current account balance to GDP 43.4 36.6 29.8 31.9 15.5 16.6 Economic Indicators (%) n.a = not available Sources: International Monetary Fund (2016), Brunei Darussalam: Statistical Appendix, IMF Country Report No 16/310, September 2016 International Monetary Fund, International Financial Statistics Yearbook 2018 Data for 2017 are obtained from Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam The data in Table suggests the following:  The proportion of oil and gas exports out of goods exports has declined gradually This ratio has declined to 86.1 percent in 2014 from 97.7 percent in 2008 The decline in this ratio is mainly due to the downturn in oil prices in 2014  The proportion of goods export out of GDP has also declined from 65.3 percent in 2008 to 45 percent in 2017 The decline in this ratio was also a direct result of the decline in oil and gas revenues  The ratio of goods imports to GDP has increased during the period from 16 percent in 2008 to 25 percent in 2017    The ratio of goods import to exports increased sharply to reach 56 percent in 2017 The ratio of trade balance to GDP has also declined from 49.3 percent in 2008 to 20 percent in 2017 The decline in oil exports combined with deficit in services balance and net income depleted the gains from trade surplus in Brunei This resulted in a continuous decline in the surplus on the current account The ratio of current account to GDP declined sharply from 43.4 percent in 2008 to 16.6 percent in 2017 4.Determinant of Trade Balance of Brunei This section analyses the effect of oil and gas (LNG) price on trade balance of Brunei for the period 1991 to 2017 A single equation regression model is used for this purpose Previous empirical studies use regression of trade balance to oil price (see for example, Rafiq, Sgro and Apergis, 2016; Nguyen, 2014) In this study we use combined oil and gas price, instead of oil price only The justifications for using combined oil and gas price are: (1) LNG exports are larger than crude oil exports of Brunei, and (2) on average, oil export is 50 percent and LNG export is also 50 percent to total oil and gas export in barrels of oil equivalent (see Table 4) Table 4: Export volume of oil and LNG for Brunei, 1991 to 2017 Year Oil export % LNG export % 199 199 55 57 44.5 199 199 55 56 199 199 52 51 47.6 199 199 50 49 49.8 199 200 52 54 47.8 200 200 53 54 46.4 200 200 53 53 46.8 200 200 53 53 46.6 200 200 50 47 49.8 200 201 48 49 201 201 47 47 201 201 42 44 57.3 201 201 43 43 56.4 42.6 44.3 43.4 48.5 50.3 45.6 45.6 46.8 46.9 53.0 51.7 50.9 52.3 52.9 55.8 57.0 201 Average 40 50 59.9 49.6 Source: Based on the data for export of oil and LNG in barrels of oil equivalent per day (as calculated by the author) This indicates that the price of oil and the price of natural gas should be combined into a single measure as independent variable in the regression model Therefore using a combined oil and gas price a single equation regression model is specified as follows: TBt = a0 + a1OGPt + ut where, TB is trade balance (exports of goods minus imports of goods) for Brunei in millions of US dollars OGP is combined oil and gas price for Brunei (U.S dollars per barrel of oil equivalent) u is the error term TB (Trade balance) is defined as goods exports minus goods imports (measured in millions of US dollars) Data for this variable are obtained from the publications of International Monetary Fund:  International Financial Statistics Yearbook 2018  International Financial Statistics Yearbook 2009  Brunei Darussalam: Statistical Appendix, IMF Staff Country Report No.97/113, November 1997  Brunei Darussalam: Recent Economic Developments, IMF Staff Country Reports No 99/19, April 1999  IMF Concludes 2003 Article IV Consultation with Brunei Darussalam, Public Information No 04/2, January 2004 Data for the year 2017 are obtained from Department of Statistics, Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam OGP is combined oil and gas price, measured as a barrel of oil equivalent in US dollars Price of oil export is available in US dollars per barrel, and the price of LNG (liquefied natural gas) export is in US dollar per million BTU (British thermal unit) As a way of combining oil and gas prices into a single measure, we use the “barrel of oil equivalent”, BOE (see Wikipedia, the free encyclopedia) OGP is calculated as follows:  Barrel of oil equivalent (BOE) = 5.8 million BTU  Gas price per million BTU x 5.8 = Gas price per barrel of oil equivalent  Gas export in million BTU ÷ 5.8 = Gas export per barrel of oil equivalent  Oil and gas price combined per barrel = (oil export %) x oil price + (gas export %) x gas price  Example for the year 2017:  Gas price per barrel = US$8.18 x 5.8 per barrel = US$47.44 per barrel Oil and gas price combined per barrel = 40.1÷100 x US$55.93 + 59.9 ÷ 100 x US$47.44 = US$50.84 per barrel Data for price of oil export (US$ per barrel) and the price of LNG export (US$ per million BTU) are obtained from:  Brunei Economic Bulletin, Vol 7-Issue 2, December 2010 Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam  Brunei Darussalam Statistical Yearbook 2011 and 2015 editions Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam Data for export of oil (US$ per barrel) and export LNG (US$ per million BTU) are from Brunei Darussalam Statistical Yearbook 2006, 2008, 2011, 2016 editions  Brunei Darussalam: Recent Economic Developments, IMF Country Report No 99/19, April 1999  Brunei Darussalam: Statistical Appendix, IMF Country Report No 08/165, May 2008  Brunei Darussalam: Statistical Appendix, IMF Country Report No 97/113, November 1997 The estimation of the regression model is based on annual data for Brunei for the period from 1991 to 2017 Expected sign of coefficient a1 is positive, as suggested in the literature This is because as oil price rises, oil exporters get more revenues from exporting oil To find out the relationship between TB and OGP, a regression of OLS (ordinary least squares) is carried out, using annual data for the period of 1991 to 2017 All the variables are taken in natural log form The results of regression are as follows: Dependent variable: Ln TBt Term Ln OGPt Constant Coefficient 1.3332 2.7824 SE Coefficient 0.2936 1.1320 t-statistic 4.5404 2.4580 Prob 0.0001 0.0219 R-square = 0.9105, Adjusted R-square = 0.9028 F-statistic = 117.0549 Durbin-Watson stat = 1.8027 It is to be noted here that Durbin-Watson statistic presented here (1.8027) is CochraneOrcutt corrected value In the initial regression, our computed Durbin-Watson statistic was less than the lower critical limit for 27 observations and one explanatory variable at the percent level Low Durbin-Watson statistic indicates positive serial correlation, the coefficient estimates of OLS are inefficient, although still unbiased (Pindyck and Rubinfeld, 1998) In order to correct for the presence of positive first-order serial correlation, an autoregressive error specification AR1 method is used The results show that regression coefficient of LnOGP (1.3332) has a statistical significance at percent and a positive sign Specifically, an increase of percent in oil and gas price can lead to an increase of 1.3332 percent in trade balance 5.Conclusions and Policy Implications of the Results Major findings of this paper may be summarized in the following: Even though oil and gas (LNG) exports still constitute most of the goods exports (93 percent), the contribution of oil and gas exports to GDP has declined gradually in Brunei due to the decline in oil prices  The proportion of import value of goods to GDP increased in the face of declining oil and gas revenues (16% in 2008 to 25.2% in 2017)  The ratio of trade balance to GDP in Brunei has declined continuously from 49.3 percent in 2008 to 19.8 percent in 2017  The proportion of current account balance to GDP has declined continuously from 43.4 percent in 2008 to 16.6 percent in 2017  Brunei has experienced a continuous deficit in the service balance (export and import of services) throughout the period from 2008 to 2017  The decline in oil and gas exports has resulted in a continuous decline in the surplus on trade balance A single equation regression model is estimated to examine the impact of fluctuations in oil and gas prices on trade balance of Brunei The results indicate that combined oil and gas price is a significant determinant of the trade balance of Brunei The paper also finds that Brunei received lower oil and LNG export revenues due to a sharp decline in oil and gas prices since 2014 This has created a significant impact on the trade balance The trade balance in Brunei has remained in surplus but narrowed over the past three years with falling oil and gas prices As the export decline outpaced imports with falling oil and gas prices, the trade surplus continued to shrink As services and secondary income accounts remained in deficit, current account surplus continued to shrink As low oil and gas price has reduced oil and gas export revenues of Brunei, this has caused fiscal balance of the country to deteriorate One policy implication of the results is that the current low oil and LNG prices can serve as an opportunity for Brunei to consider new sources of revenue Government revenues can be increased by focusing on cutting government spending in areas where it does not affect consumers, getting more foreign direct investment into Brunei, and increasing non-oil exports in order to avoid trade impulses from oil price shocks These measures have also been suggested for GCC countries (Brookings Doha Center, 2016) In an effort to increase revenue, the government of Brunei has recently intensified its efforts towards a more broad-based diversification of the economy The government has also intensified its reform efforts in terms of 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Production of oil in Brunei has often fluctuated with price of oil in the international market We will find the impact of fluctuations in oil prices on the main components of balance of payments of Brunei. .. significant impact on current account of Brunei 3.2 .Balance of Payments Performance The balance of payments statistics of Brunei are presented in Table Table 3: Balance of Payments of Brunei, 2008... the impact of fluctuations in oil and gas prices on trade balance of Brunei The results indicate that combined oil and gas price is a significant determinant of the trade balance of Brunei The