East Timor Country Risk Report 2019
We forecast Timor-Leste's growth to strengthen to 4.3% in 2019 and 5.0% in 2020 from our estimate of -0.2% in 2018. We believe that Timor-Leste's fundamental growth drivers remain strong, with the acceleration of infrastructure activity in 2019 and the construction of fibre optic cable likely to support digitalisation and boost investment. That said, we note that investment in the 'Tasi Mane' infrastructure project may drain the government's resources, presenting a downside risk to our forecast.
The Timor-Leste government is likely to continue drawing down from its national Petroleum Fund (PF) over the forecast period, as oil sector revenues dry up and non-oil revenues fall far short of the country's spending requirements. This trend represents an underlying threat to the long-term sustainability of public finances, though the size of the PF and very low levels of debt mean risks to stability are currently low. Financing the government's high-risk Tasi Mane petroleum project will require a massive increase in borrowing and could further deplete the PF, implying higher risk and uncertainty in our long-term fiscal outlook.
Relations between Timor-Leste and Australia are likely to continue improving after parliaments in both countries approved the necessary legislation to ratify the landmark Maritime Boundary Treaty. Implementing the Treaty is also a positive step for the exploitation of offshore oil and gas resources in the Timor Sea, including the massive Greater Sunrise field, which is central to Timor-Leste's long-term economic outlook. Timor-Leste could potentially benefit from the growing geopolitical rivalry between China and Australia in the region, though it remains unclear whether it can secure funding to develop an onshore petroleum industry.
Timor-Leste will continue to inch towards membership of the Association of South East Asian Nations (ASEAN), though we expect the process to remain slow, with a decision not likely until at least 2020. Our core view is that the country will eventual be granted entry into the bloc, creating opportunities for increased economic integration and security cooperation. ASEAN membership in itself is no silver bullet for Timor-Leste's economic development, though we believe that it should be a net positive for the country's political and economic risk environment over the longer term.
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