Papua New Guinea and Timor-Leste: Australia’s Struggling Neighbours

23 September 2020 Jarryd de Haan, Research Analyst, Indo-Pacific Research Programme

Background

With the COVID-19 pandemic causing havoc in economies across the globe, smaller countries that were already struggling before the crisis now face looming obstacles. While both Papua New Guinea and Timor-Leste have been relatively untouched by the pandemic itself, the virus has had a significant impact on their respective economies.

Comment

In the case of Papua New Guinea, a recent government economic report has predicted that the economy will contract by three per cent this year due to COVID-19, down five percent from previous estimates of two per cent growth. As a consequence, PNG’s ongoing debt problem is likely to be elevated, as mentioned later in the report:

The nominal fall in GDP is enough to lift the 2020 Budget debt-to-GDP ratio from 40.3 per cent to 45.6 per cent. Looking forward, the impacts of COVID-19 are expected to continue into 2021, with scenarios to lift the debt-to-GDP ratio to over 55 per cent, even with improved revenues and severe constraints on the operating budget.

The majority of those debts are to China and, given the slow pace of repayments, that setback could add decades’ worth of repayments to those debts.

In Timor-Leste, the sharp plunge in oil prices earlier this year, due to COVID-19 and an oil price war between Saudi Arabia and Russia, has put an already vulnerable economy at greater risk, especially considering the fact that oil revenues account for approximately eighty per cent of government expenditure. On top of that, a political impasse has meant that the government has yet to approve a 2020 state budget, meaning the country has had to operate under a duo-decimal system, the same system that was blamed for the economic contractions in 2017 and 2018.

Looking ahead, the Timor-Leste Government is also spending a significant amount of resources on the Tasi Mane project, which aims to establish onshore petroleum development facilities in Timor-Leste. The funding required for such a project is immense, with cost estimates ranging from $10 billion to $20 billion. As of writing, however, no private investors have come forward to join the project. For Australia, that is concerning, given China’s expressed interest in the project. A recent call between the Timor-Leste Foreign Minister and his Chinese counterpart also saw both parties discuss closer co-operation in the Belt and Road Initiative, potentially strengthening China’s position as an investor for Tasi Mane. Once completed, the project will be responsible for providing the vast majority of Timorese wealth and includes the construction of a port, shipbuilding and ship repair facilities located approximately seven hundred kilometres from the Port of Darwin, which is being managed by a Chinese company under a 99-year lease.

From those vulnerabilities, the inroads for the Chinese Government into PNG and Timor-Leste have been strengthened. While the Australian Government has recently loaned $135 million to PNG to help finance budget shortfalls and has an ongoing aid programme for both countries, Australia is not in a strong position financially to help much further. Additionally, with a rapidly deteriorating trade relationship with China, the Australian Government may be pressured to tread lightly in dealing with its close neighbours.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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