Trying Times for Timor-Leste

18 March 2020 Jarryd de Haan, Research Analyst, Indo-Pacific Research Programme

Background

After months of political impasse, a six-party coalition, led by Xanana Gusmão, offered to form government on 10 March. The Timor-Leste parliament has been scrambling to form a government since the Prime Minister’s resignation in February, as a result of the governing coalition failing to pass the 2020 state budget. Prime Minister Taur Matan Ruak will remain on active duty until President Francisco Guterres formally accepts his resignation, which will occur after a replacement has been found.

Guterres is faced with two options: remodel the government, based on Gusmão’s coalition; or dissolve the government and call another election. Once a new government is formed, a new budget may be proposed, although there have been some reports that it may be delayed until September 2020, due to constitutional laws.

Comment

Without an approved state budget, the Timor-Leste Government will need to operate under a duodecimal budget system, with each government agency spending one-twelfth of the previous budget’s allocation each month. While that allows the agencies to operate, it also constrains public spending. Access to the country’s sovereign wealth fund (the Petroleum Fund), requires parliamentary approval, which is usually arranged through the state budget processes. Without a state budget, extra expenditures need to be covered by domestic revenues instead.

A World Bank report detailed the impacts of the duodecimal budget system and constraints on public spending, on Timor-Leste’s economy in the first nine months of 2018:

This had a notable impact on the private sector, affecting both consumer and business confidence. Private consumption is thought to have declined, especially since public spending on wages & salaries and personal benefit transfers both fell by 1-2 percent and thus failed to sustain consumption as they did in 2017. Private investment was also relatively subdued. Imports of goods and services declined marginally despite stronger demand for construction services in the last quarter of the year – which was linked to public investment projects.

It is likely that this year will see similar declines under the duodecimal system, especially if the budget is delayed until after September. Reports that the Timor-Leste Government is discussing a withdrawal US$250 million from the sovereign wealth fund, could alleviate some of that pressure.

External factors, namely the COVID-19 pandemic and an oil price war between Saudi-Arabia and Russia, are also putting pressure on Timor-Leste’s Petroleum Fund. The bulk of Timor-Leste’s wealth, which is gained from oil and gas revenue, is funnelled through the Petroleum Fund, where it is invested overseas to help grow the fund. As of 2019, approximately 45 per cent of investments were put into US Government bonds, 22 per cent into US equities and fifteen per cent into other global equities. Since the outbreak of COVID-19, however, US bond yields, as well as global share market prices, have fallen significantly. With many experts predicting further falls, the expected return on this year’s investments is likely to fall well below the three per cent benchmark. On top of that, a collapse in the oil price means that there will be less revenue going directly into the fund, which has already been experiencing dwindling revenues since peaking in 2012.

Those pressures could have long-term implications for the Timor-Leste economy, by shrinking the balance of the fund and exacerbating the issue through continuing heavy withdrawals. A previous Strategic Analysis Paper outlined the critical need to keep the petroleum balance healthy, as it transitions from sourcing revenue from the Joint Petroleum Development Area to the Greater Sunrise region. With a successful transition and assuming continuing heavy withdrawals, Timor-Leste can expect the fund to manage to fuel its economy until 2050.

With the newly-added pressures, however, the balance of the fund is likely to dip further than anticipated and shorten the life of the fund. That would also narrow the window of time that Timor-Leste has to develop its non-oil infrastructure to a point where it can sustain the economy without depending on oil revenue.

While budget concerns, COVID-19 and the oil price war will pass with time, it is quite likely that significant damage has already been done.

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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