China throws sinking Brunei a lifeline

Brunei’s ruler, Sultan Hassanal Bolkiah, is in a race against time as his nation’s once deep stores of oil and gas rapidly run dry. While other foreign investors up stakes, China is giving the Southeast Asian sultanate a new lease on economic life.

International banks such as HSBC and Citibank have recently ceased operations in Brunei in sight of its contracting oil and gas business, driven down by years of depressed global energy prices. But one major financial institution has filled the vacuum: Bank of China (BOC).

BOC established a branch in Brunei in 2016 to facilitate Beijing’s foreign direct investments. Yang Jian, China’s ambassador to Brunei, last year described the sultanate as an important node in the US$1 trillion Belt and Road Initiative (BRI), President Xi Jinping’s signature continental and maritime infrastructure development initiative.

Some observers believe China intends to leverage its major investments and close political ties with Brunei’s ruler to sway the country’s stance on territorial disputes in the South China Sea, where the sultanate is also a rival claimant. That, they say, would deter other Southeast Asian claimants from reaching consensus on the issue.

“China is placing huge pressure on Brunei to concede ‘joint development’ in its exclusive economic zone (EEZ). These are rights that clearly belong to Brunei by any reading of the UN Convention on the Law of the Sea (UNCLOS),” says Bill Hayton, associate fellow at the Asia-Pacific Program at Chatham House.

“Brunei would be happy to take investment from Japan, other Southeast Asian states, the United States or Europe. However, at the moment, only Chinese entrepreneurs are looking at the opportunities,” he told Asia Times, noting that Brunei was so far “standing firm” with regards to upholding its rights to maritime resources.

Beijing has deepened diplomatic ties with other regional governments by offering investment projects, generous aid packages and trade deals. Those moves have sometimes spurred opposition and anti-Chinese sentiment on sovereign concerns. Until now, Brunei’s oil wealth had enabled it to avoid economic dependence on China.

But unless new sources are discovered, those reserves will be depleted within two decades at the current pace of extraction, according to various research projections. Though it has supported regional free trade and promoted non-energy sector investments, observers believe the small country is ill-prepared for the hurdles ahead.

Brunei’s monarch, long wary of the country’s unhealthy reliance on the energy sector, now appears to see Beijing’s checkbook diplomacy as necessary to jumpstart diversification. He is thus allowing the sultanate to become a regional outpost for Chinese business, if not strategic, interests.

The two sides established the Brunei-Guangxi Economic Corridor (BGEC) in 2014 to boost bilateral trade and investment. BGEC is slated for over US$500 million in joint investments that will deepen economic engagement with China’s southern Guangxi Zhuang region, which has direct access to the South China Sea.

China is by far Brunei’s largest foreign investor, with total investments estimated at around US$4.1 billion. The China-backed Muara Besar refinery and petrochemical complex, the largest foreign investment project in Brunei’s history, will fortify that position. Chinese investment has paid the first phase of construction worth US$3.4 billion; the second phase will cost an estimated US$12 billion.

Hengyi Industries International Pte Ltd, a privately run Chinese company based in Bandar Seri Begawan, is constructing the facility and expects to start operations by the first quarter of 2019. The complex is expected to create more than 10,000 jobs and includes a 175,000-barrel-per-day capacity that will produce gasoline, diesel and jet fuel.

A new strategic joint venture between China’s Guangxi Beibu Gulf Port Group and Darussalam Assets Sdn Bhd, a government-linked investment company, began operating last year the Muara Container Terminal, Brunei’s largest port. Chinese companies are also invested in the sultanate’s telecommunications and agriculture sectors.

“Brunei’s government is well-aware of the risks of over-close engagement with China. It coordinates very closely with the government of Singapore on such matters,” says Hayton. “The UK also has a special defense arrangement with Brunei and the Anglo-Dutch energy company Royal Dutch Shell dominates the country’s oil industry.”

Britain’s military presence in Brunei has persisted since the country’s independence, achieved in 1984, at the request of the sultan. London’s last remaining military base in the region is seen by British authorities as an important outpost against the backdrop of the percolating South China Sea disputes.

The sultan, the world’s second-longest reigning monarch, also directly finances Britain’s military presence and entrusts a Gurkha unit retired from the British army with his personal security. He rules through a Cabinet of Ministers similar to the British system and pegs Brunei’s national currency to the Singapore dollar in the absence of a central bank.

Speaking at Brunei’s annual session of parliament earlier this month, the Muslim monarch called for greater diversification of the economy to reverse the country’s declining fortunes. “Wawasan 2035,” or Vision 2035, aims to transform the country into a regional trading and financial hub within the next two decades.

The launch of a long-planned Brunei stock exchange, slated to open in coming years, will lay the groundwork for promoting more investment outside of the energy sector and provide an alternative funding source for fledgling small businesses. Telecom, downstream energy firms and financial institutions are expected to list on the market.

Sultan Hassanal, 71, holds the portfolios of prime minister, defense minister, finance minister and minister of foreign affairs and trade. He marked 50 years in power last October with a golden jubilee procession. Though revered among his subjects, the citizenry appears frustrated with a sluggish economy, corruption and unemployment.

Hydrocarbon revenues have until now financed generous subsidies and welfare policies, including free education and healthcare for its largely ethnic Malay population. But as energy reserves and national finances dwindle, those policies could soon give way to austerity measures.

After four years of a downturn, Brunei’s economy is expected to see a modest recovery in 2018, linked to recovering global oil prices. The sultanate collected US$3.76 billion in revenues last year, with 75% derived from hydrocarbons, but will still record a US$1.5 billion fiscal deficit. In 2016, the deficit hit US$2.6 billion.

Attracting more FDI is the sultanate’s current prerogative. Brunei is a signatory to the TPP-11, or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), trade pact and a party to ongoing negotiations for the Regional Comprehensive Economic Partnership (RCEP) regional trade deal advanced by China.

China’s substantial string of investments represent an important vote of confidence for Brunei’s monarch. Dwindling hydrocarbon reserves and pressing diversification needs have tilted the sultanate decidedly into China’s corner, where it is seen as a potential key ally to Beijing as it pursues its own strategic maritime objectives.

“Vietnam, Singapore, the Philippines, Malaysia and Indonesia are either US treaty allies or China-wary countries. Brunei is the only place where Beijing would least likely meet any resistance to its blue-water naval aspirations,” says Maung Zarni, a former associate professor of Asian Studies at the University of Brunei.

“In light of recent geopolitical and strategic developments, this tiny sultanate with apparent insignificance as a consumer market and limited resource potential has become important to China’s planners and strategists,” he said.