Timor-Leste's Growth Remains Strong as Long-term Fiscal Outlook Tightens - ADB

Timor Leste’s non-oil economy will continue to grow strongly in 2014 and 2015, driven by government spending and private sector growth, according to the Asian Development Bank’s (ADB) Asian Development Outlook 2014 (ADO).
GDP growth of 8.5% is expected for the next two years, a modest rise from the 8.0% growth registered in 2013.

“The greatest challenge for policymakers is to translate petroleum wealth into jobs and services that produce sustainable and inclusive growth,” said Shane Rosenthal, ADB’s Timor-Leste Country Director. “This will require significant, long-term investments in education, skills training, and infrastructure such as roads, water supply, and electrification. ADB is a committed partner in these investments.”

Recent years have seen Timor-Leste’s growth moderating from the double digit growth rates registered from 2007 to 2011, as government spending has slowed. Annual government spending totals more than 80% of non-oil GDP, with most of the spending funded from oil royalties.
The offshore Bayu-Udan gas field brings in 95% of Timor-Leste’s oil and gas royalties, but production forecasts now suggest that production peaked in 2012 and reserves in the field could be exhausted by 2021 — four years earlier than previously thought. The modest adjustment in the expected future stream of oil royalties the timeliness of the government’s efforts to adjust downward its long term expenditure plans.

Although the 2013 budget planned increases in public capital investments of more than $800 million, project implementation delays resulted in only 43% of these funds being spent. The 2014 budget projects a 38% rise in recurrent expenditure and a 47% increase in government capital investment. However, because actual expenditures have fallen short of budgeted amounts in recent years, the effect of this spending on growth and inflation is hard to gauge.
In addition to growth driven by public expenditure, a 13.6% expansion in private sector credit and rising foreign direct investment has supported strong business growth. Trade statistics suggest that this growth was concentrated in services such as retail, wholesale, transport, and communications. However, financial markets remain underdeveloped with the ratio of private sector credit to non-oil GDP only 11.3%.

Inflation moderated in 2013 as a result of the lower government spending, the appreciation of the US dollar against many of the country’s leading trading partners, and lower international food prices. This marked a reversal of the trend toward higher inflation seen since 2011. Average annual inflation fell to 9.5% in 2013 from 10.9% in 2012.