Timor-Leste: Economy

In Timor-Leste, non-oil gross domestic product, which is GDP excluding the direct value of activities in the extraction of crude petroleum and natural gas, is now projected to grow by half a percentage point less than the Asian Development Outlook (ADO) 2014 forecast for 2014 and 2015 in April, as sluggish growth in credit to the private sector suggest slower business expansion. The inflation projection for 2014 is slashed by more than two-thirds, in light of early inflation outcomes, and is cut for 2015 as well. However, there is risk of higher inflation as rising government spending is expected to put upward pressure on prices toward the end of 2014.

Selected Economic Indicators (%) - Timor-Leste 2014 2015
ADO 2014 Update ADO 2014 Update
GDP Growth 8.5 8.0 8.5 8.0
Inflation 9.5 3.0 9.0 5.4
Current Account Balance (share of GDP) 47.0 51.5 50.3 55.1

Source: ADB estimates.

Increased government spending is providing strong stimulus to the economy. Actual expenditures in the first 8 months of 2014 were 34.9% higher than in the same period of 2013, with all classes of spending increasing: capital investments by 41.7%, salaries and wages 14.3%, goods and services 34.1%, and transfer payments 33.7%.

Credit to the private sector grew more slowly in the first quarter than in recent quarters, and contracted slightly in the second quarter, suggesting that the pace of business expansion has slowed. Revisions to recent business activity surveys confirm the dominant role of the construction and retail sectors in Timor-Leste’s nonpetroleum economy. In 2012, these sectors accounted for 68% of value added by the formal private sector excepting agriculture. Both sectors rely heavily on demand traced to government spending. The government has approved an indicative budget that allows for total expenditures of $1.3 billion in 2015 - $200 million less than in the 2014 budget. However, previous years have seen actual budgets exceed their initial fiscal envelopes by substantial margins.

Royalties from offshore oil production and taxes in the first half of 2014 totaled $1.1 billion, or 75% of the government’s forecast for the whole year. This, and the return on investment from past savings, brought the Petroleum Fund balance to $16.6 billion or $13,800 per capita. The government has now achieved its objective of investing 40% of fund assets in equities, with the remainder invested in high-quality bonds.

With a correction to earlier reporting, spending on imports declined by 13.1% year on year in the first half of 2014. Increased spending on food, fuel, and vehicle imports was more than offset by lower spending on construction materials and other goods. Export earnings in the first half of the year were flat ahead of the June-October coffee harvest.

Following nearly 3 years of double-digit inflation, consumer price rises have slowed significantly since the last quarter of 2013, averaging just 1.3% in the first 2 quarters of 2014. An improved methodology for measuring inflation was introduced in January 2013 along with changes in how data are collected and processed. These changes likely contributed to the reported decline in inflation, but it is not possible to quantify this using published data. Exogenous factors have also contributed to price stability. The sustained appreciation of the US dollar against the currencies of Timor-Leste’s key trading partners, and declining international prices for rice and other food items have lowered import costs.

Source: ADB. 2014. Asian Development Outlook 2014 Update. Manila.