Economic Analysis
Timor-Leste

Timor-Leste

Population 1.3 million
GDP per capita 2,164 US$
E
Country risk assessment
C
Business Climate
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) -3.5 -0.2 4.5 -3.0
Inflation (yearly average, %) 0.5 2.3 2.5 3.2
Budget balance (% GDP) -20.8 -15.2 -24.3 -31.4
Current account balance (% GDP) -11.4 -6.9 1.1 -2.9
Public debt (% GDP) 6.2 9.0 12.2 12.9

(e): Estimate. (f): Forecast.

STRENGTHS

  • Oil and gas reserves in the Timor Sea
  • Supported by the Community of Portuguese Language Countries
  • Attractive tourist destination (protected natural sites, rich cultural heritage)

WEAKNESSES

  • Vulnerable to natural disasters (landslides, typhoons, floods)
  • Underdeveloped infrastructure (health, education, transport)
  • Very heavily dependent on oil income (98% of exports) and food imports (weak development of agriculture)
  • Human capital deficit
  • Almost half the population lives below the poverty threshold
  • High unemployment among young people (40%)
  • Weak bank intermediation

RISK ASSESSMENT

Growth supported by public investment and new infrastructure

Non-oil GDP growth is expected to stabilize this year to nearly 5% driven by public spending (106% of non-oil GDP). The government’s strong fiscal stimulus will continue to support growth, with a USD 1.95 billion budget approved for 2020 (64.3% of GDP), which gives priority to economic development and connectivity under the Strategic Development Plan (2011/2030). In this regard, 2020 will see the completion of the Tibar commercial port with a capacity of one million tons per year. This project will also involve the construction of new access roads connecting Tibar to Dili, where the airport will be expanded by 2022. Additionally, the installation of fibre optic cabling this year will improve ease of doing business and productivity in the country, which has been relying on expansive satellite coverage. Having said this, the economy relies heavily on the oil sector, of which the revenues represent 98.3% of total exports, making Timor-Leste one of the most natural-resource reliant countries in the world. While oil production is expected to end in 2022, the recent Greater Sunrise gas project in collaboration with Australia would take over. Otherwise, the economy depends on coffee harvest, which is weather-dependent, and accounts for 90% of total exports excluding oil. Private investment is likely to remain modest in result of a weak business environment. Private consumption will remain robust while inflation is expected to rise to 4% on the back of higher global food prices, especially rice and pork due to African swine fever.

 

Deficits to increase due to volatile oil-reliant revenues

The fiscal deficit is likely to increase amid revenues uncertainties and the government’s fiscal expansionary stance to support the economy and to reduce poverty. Considering that the oil industry makes up 75% of total revenues, a decline in oil revenues due to lower oil prices in 2020 means that the deficit will largely be funded on the back of the Petroleum Fund (PF, estimated at 506% of GDP in 2018) withdrawals which provide 90% of the economy’s budget yearly. Since 2009, annual withdrawals have averaged about 5% of petroleum wealth, which consists of the Petroleum Fund balance and the forecasted net present value of the future petroleum revenues. In addition, the Tasi Mane Petroleum project, which is an oil infrastructure corridor, is expected to be operational by 2026. The project is likely to weigh on public finances, as it requires the government to spend USD 17.5 billion from the PF, limiting spending on public services such as education (10% of spending), water sanitation (2%) and healthcare (5%), as well as on agriculture (2%). That said, the country benefits from USD 162.6 million in grants (19% of revenues) from development partners, representing the second source of revenue after the oil industry.
The current account will narrow due to lower imports but be in deficit due to a significant trade deficit linked to volatile coffee exports (90% of total exports excluding oil), which rely heavily on weather conditions. It will be financed by divestment of the PF portfolio, along with external borrowing (5.1% of total GDP, from the Asian Development Bank and the World Bank) and FDI inflows (1% of GDP). The country has large buffers with reserves now covering around 6.4 months of imports, provided by the PF.

Closer cooperation sought in the region

Timor-Leste is a semi-presidential democratic republic led by President Francisco Guterres (since May 2017). The government of Prime Minister Taur Matan Ruak (since the early elections of 2018) relies on the Alliance of Change of Progress coalition composed of three parties (National Congress for the Reconstruction of Timor Leste. Popular Liberation Party and KHUNTO).The country has been seeking ASEAN membership since 2011 and is getting closer to the accession. Despite political stability in recent years, ASEAN members again postponed their decision in 2019 due to concerns over the country’s ability to meet financial and political commitments. CMLV countries (Cambodia, Myanmar, Laos and Vietnam) express concerns over its membership, as it might deplete ASEAN’s limited resources, while some members worry that liberal countries might use Timor-Leste to denounce authoritarian governments in ASEAN. In fact, according to the Democracy Index 2018, the country’s democratic system is actually better than the ASEAN members, ranked 7th in Asia-Pacific. That said, poverty and corruption levels (ranked 105th by Transparency International) remain high and could threaten the country’s recent political stability. According to the United Nations Human Development report of 2014, 67% of the workforce live with less than USD 2.00 a day. On a more positive note, relations with Australia are improving thanks to a treaty recently agreed upon by both countries, which establishes maritime borders in the Timor Sea. This paved the way for further collaboration, notably on the development of the Greater Sunrise natural gas project with Timor-Leste holding 70% of the revenue.

 

 

Last update: February 2020

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