Indonesia
China
Japan
Singapore
Australia
Taiwan (Republic of China)
IndiaPublic spending will continue to drive growth
Economic growth was fuelled by public spending and private consumption in 2024, which should continue to drive growth in 2025. Private consumption should benefit from increased tourist arrivals, government transfers and declining inflationary pressures thanks to the moderation in global energy and food prices. Major infrastructure projects will continue to be developed, notably electricity grid expansion, road and transportation improvements, waste and sanitation, or the rehabilitation of President Nicolau Lobato International Airport. In addition, specific allocations are aimed at improving human capital by improving the education system, health infrastructures, or drinking water access. Public spending is essential to support households, as the country's economy is poorly diversified and dependent on the oil and gas sector whose revenues have declined due to reduced production levels in the Bayu-Undan gas field, which continues to operate but is in its tail-end phase. The dwindling oil reserves are hampering public spending needs and the absence of gas revenues has prompted excessive withdrawals from the Petroleum Fund, which could lead to its total depletion by 2036 if the new field is not brought on stream by then.
Exports are likely to remain low due to the depletion of hydrocarbons, which used to account for around 95% of the country's exports. However, exports of coffee (now the country's largest export item) should benefit from higher prices amid limited world supply, coupled with quality and productivity gains through the development of specialty coffees. Imports on the other hand could rise due to the need for capital goods associated with investment projects and the acceleration of private consumption.
The country's export earnings will only improve significantly if the commissioning of the Greater Sunrise project is successful. The project aims to exploit large reserves of natural gas and condensate (5.3 trillion cubic feet of dry gas and 226 million barrels of condensate), which could generate significant revenues for Timor-Leste's economy. However, the project is still not operational, mainly due to disagreements with its partners (Woodside Energy and Osaka Gas) regarding the location of the processing plant. The field is located 150 km from the Timorese coast, but also 450 km from Darwin, Australia. While Timor-Leste wants the gas processing plant to be located on its territory (as it would allow them to develop a downstream chemical industry), Woodside argues that setting up the plant in Darwin would be less costly. On that score, Timor-Leste lacks infrastructure and skilled manpower, whereas Australia (Darwin, in particular) already has a well-established gas liquefaction infrastructure, enabling operating costs to be reduced through economies of scale. However, the difference in total costs is not clear as wage and tax levels are much lower in East Timor. Also, the distribution of financing for a liquefaction plant in Timor-Leste could pose problems due to the respective shares of the partners involved in the project. Negotiations between the parties are therefore complex, but an agreement between Timor-Leste and Woodside were supposed to be finalised by November 2024, which would potentially have set the project in motion.
Deep twin deficits financed by Petroleum Fund
The budget balance is likely to remain largely in deficit due to the undiversified economy that limits sources of financing. The sharp drop in gas production (and soon its demise) has considerably widened the public deficit. In addition, the lack of economic diversification limits employment opportunities, leading households to depend heavily on public spending. Most of its funding comes from the Petroleum Fund (approximately 80 %), followed by international aid. Although withdrawals from the Fund are normally limited to 3% of its assets, a level that corresponds to the Fund's expected revenues, surplus withdrawals are authorised and exercised. Withdrawals have been thrice the level considered reasonable since 2007, making the Fund's management all the more unsustainable given its shrinking revenues. However, managing the Fund in this way has made it possible to keep the debt level low.
The current account balance is set to remain deeply negative due to the significant trade deficit. The trade balance, which benefited from gas exports until 2022, is now showing a yawning deficit due to the depletion of the only gas field in production and to increasing imports. The lack of domestic production coupled with rising domestic consumption and investment needs have sparked high import demand, particularly for capital goods and consumer products. The Petroleum Fund together with the increase in external public debt, which is entirely concessional and multilateral, and low, will finance the deficit.
Political stability and growing regional integration
Nobel Peace Prize winner José Ramos-Horta, who was formerly President between 2007 and 2012 and who is currently backed by the National Congress for the Reconstruction of Timor (CNRT), returned to power as President in the 2022 presidential election, winning 62.1% of the vote in the second round against incumbent Fretilin. In 2023, independence hero Xanana Gusmão again became Prime Minister following the legislative elections. In the May 2023 elections, CNRT won 31 seats, while FRETILIN secured 19 seats. The shift allowed CNRT to lead the new government coalition with the Democratic Party (PD), which holds 6 seats. With a parliamentary majority, the current government faces no serious political opposition from FRETILIN, its long-standing adversary. The situation has stabilised the political landscape and facilitated decision-making, all the more so as the elections took place smoothly and transparently.
Timor-Leste's strategic location in Southeast Asia makes it a focal point for regional geopolitics. The country seeks to enhance its regional integration by becoming part of ASEAN. It formally applied for ASEAN membership in 2011 and ASEAN leaders agreed in principle to admit Timor-Leste in November 2022. The 42nd ASEAN Summit in May 2023 tabled a roadmap and endorsed the organisation's support for the country's efforts. Meanwhile, Timor-Leste's efforts to diversify its international partnerships have led to greater engagement with China. Accordingly, relations between the two countries have intensified, with José Ramos-Horta's visit to China in July 2024 being the first visit by a Timorese president to Beijing since the establishment of diplomatic relations. The visit culminated in the announcement of a comprehensive strategic partnership between the two nations. China is seen as an alternative nation to Australia with which diplomatic relations have deteriorated mainly over the Greater Sunrise field issue. Aware of China's growing influence in the Pacific, Australia has sought to strengthen its ties with East Timor. As a result, Australia remains a key partner for Timor-Leste in terms of aid and security cooperation.
