Credendo sees serious challenges for East Timor’s oil and gas dependent economy, Credendo Short-Term Non-EU Risks, press release

In April, following peaceful elections, José Ramos-Horta was elected president of East Timor. His success was driven by the support of the country’s most influential political figure, opposition leader and former Prime Minister Xanana Gusmão. Parliamentary elections originally scheduled for 2023 could now be held earlier. Had he been elected and he is the favorite, Gusmao would likely have focused on oil and gas expansion and large-scale infrastructure development. During the celebration of the 20th anniversary of East Timor and his first speech as new president, Ramos-Horta announced that some of these projects could be related to China as he wanted to further strengthen bilateral ties. Exports to China have grown steadily over the past decade, and economic cooperation under the Belt and Road Initiative (BRI) is set to deepen. In addition, East Timor could join ASEAN from 2023 under the leadership of Ramos-Horta.

Following the Covid-19 shock shock in 2020, the country’s macroeconomic fundamentals improved significantly in 2021 with rising oil and gas prices. The economic recovery in 2022 continues, fueled by construction expenditure and even higher oil and gas prices. European credit insurer Credendo expects high prices to continue to support the economy in the coming years as the depletion of existing reserves in East Timor is now set to extend to around 2025. However, only moderate real GDP growth (almost 2%) is expected this year. In fact, declining hydrocarbon production partially offsets the benefits of the high prices, causing overall exports to drop to a lower level this and next year. Moreover, despite the use of the US dollar as legal tender and as a result of the inflation buffer, high commodity prices increase inflationary pressures. This year, inflation showed a steady upward trend, reaching 7.4% in May. Credendo therefore fears a slowdown in economic activity and a decline in consumer confidence, and high food prices may increase the risk of social protests in a poor country. In addition, higher imports, combined with declining hydrocarbon export volumes, will significantly increase the current account deficit from 2.7% of GDP in 2021 to 33.6% of GDP this year. The credit insurer anticipates further tightening in the coming years as oil and gas reserves are almost completely exhausted.

Credendo forecasts the same negative development of public finances. In fact, the budget deficit over the past decade has been high, double-digit, given the government’s oil and gas revenues – a largely dominant source of income – with a structural decline and high spending coupled with foreign loans to finance public investment projects. From 2023, it may rise to over 40%. Fortunately, the government can expect significant withdrawals from its large Oil Fund (PF) to fund its ambitious spending plans. This dependency will increase in the coming years as new revenue streams are found. Although PF accounted for almost 1000% of GDP in 2020, accelerating payouts could almost deplete it by 2033.

Credendo believes that the prospect of risk remains obscured by the lack of a solid alternative revenue stream for hydrocarbon reserves. On the one hand, given the still relatively underdeveloped non-oil sector, the authorities focus on agricultural and infrastructure projects as current and future growth factors. On the other hand, the potential future Gusmao government is involved in the development of the oil and gas industry. The potential development of Greater Sunrise’s oil and gas fields still seems uncertain and distant – only in 2030, due to funding gaps and delayed talks with Australia on the sharing of production Public finance and institutional quality management, therefore economic diversification beyond fossil fuels remains crucial to the country’s long-term economic stability and the creation of a sufficient number of jobs. Indeed, the oil and gas industry contributes little to local employment. Future cooperation with China will also be closely monitored. Not only on the economic front, driven by BRI projects, with arguably the first Chinese loans to East Timor, but also in terms of intensifying geopolitical play in the region. Indeed, as seen in several Pacific islands, small nations in the region are increasingly paying more attention to security and other forms of cooperation as China, the US, Australia and others compete for influence to improve their geostrategic position and defend their regional one. interested.

Credendo’s political risk assessments are expected to remain stable in the near term, while the business environment risk assessment has a cautiously positive outlook.

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