This article was updated on 25 July 2013.
For further updates, or to read an October 2013 version as a paper, see our web page on this subject.
This blog summarizes a paper we presented at the Timor-Leste Studies Association on 15 July. Download the presentation (which has many more graphics) as PowerPoint (6 MB) or PDF (2MB). You can also download the underlying Excel spreadsheet to verify the model or explore what happens with other assumptions.
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| Historical case, if current trends continue |
La’o Hamutuk has developed a spreadsheet model to predict approximately how long the Petroleum Fund can finance state activities. The model incorporates historical and projected data, showing the effects of external factors (like oil prices and interest rates) and policy decisions (such as tax and spending levels, borrowing, capital investment). We hope that it will support prudent, evidence-based planning and decision-making.
In each graph, the gray box at left summarizes the assumptions, while the green box at right summarizes the outcomes. The vertical scale is in millions of U.S. dollars (up to $20 billion), while the horizontal axis shows years from 2008 to 2040. The background turns red when Timor-Leste's desired spending exceeds our income and we can no longer pay for planned state activities. Click on any graphic to see it larger.
How long will the Petroleum Fund carry Timor-Leste?
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| Reference case, more optimistic than recent history |
- With historic trends and current policies, until 2024, with 96% austerity after 2026. This is the case shown above at left.
- If we’re lucky and smarter, until 2027, with 67% austerity after 2029. This more optimistic scenario, shown at right, is our Reference Case.
- With a lot of luck and skill, until 2036, with 56% austerity.
- With hopes and dreams, until 2037.
- If we’re lucky, strategic, prudent and wise, until our non-oil economy can replace it. This will require a change of direction from current policies.
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| What can we do to prevent Timor-Leste from going broke before these girls finish secondary school? |
Petroleum Dependency
2013 State Budget $1,648 million$787 million (48%) will come from the Petroleum Fund in 2013.
$680 million (40%) more is from the PF in the past and future.
Non-oil GDP in 2011 $1,046 million
Petroleum GDP in 2011 $3,463 million (81% of total)
South Sudan is the only country more dependent on oil and gas exports than Timor-Leste.
- State activities, paid for with oil money, are about half of our “non-oil” economy, because some of this money circulates in the local economy.
- Our GDP only grows because of increasing state expenditure.
- Balance of trade (2012): $670m imports, $31m exports.
- Half of Timor-Leste's 2013 State Budget is to build physical infrastructure, but spending on health and education is less than international norms.
- The Budget goes up much faster than inflation, faster than the GDP and faster than almost every other nation.
Sustainable budgeting is not a new idea in Timor-Leste
- 2004: Estimated Sustainable Income rule about Petroleum Fund withdrawals (always front-loaded, often exceeded)
- 2009-2013: Strategic Development Plan, Government Program, Tasi Mane Project presentations and other proposals often mention it, even though they are probably unsustainable themselves.
- 2011: UNDP National Human Development Report
- 2011-now: Ministry of Finance “Yellow Road” options, recently made public – but unlikely to be carried out.
- 2012: First La'o Hamutuk “going for broke” model
- 2013: World Bank 2013-2017 Country Partnership Strategy
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| State income for the Reference Case |
This model
- Estimates future state revenues and expenditures based on current trends, external factors and future decisions.
- Provides approximate, incremental and relative results, not precise predictions.
- Is open source – we welcome discussion and improvement.
- Takes an engineering approach, based on history, explicit assumptions and causality. It dos not include economic predictions -- GDP, inflation, poverty or trade balance -- or use dubious correlations.
Outputs from the model
- Balance remaining in Petroleum Fund
- Spending and revenues year-by-year
- Severity of budget cuts if desired expenditures cannot be paid for
- Balance owed from borrowing
- Other outputs, not shown in the graphs:
- Estimated Sustainable Income from Petroleum Fund
- Breakdown of spending: recurrent (salaries, transfers, goods & services, operation & maintenance), debt service, minor and development capital
- Breakdown of income: Electricity ratepayers, loans, domestic taxes, oil revenues, Petroleum Fund return
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| State expenditures for the Reference Case |
Assumptions and inputs which can be modified
- Global inflation, TL population growth, budgetary inter-relationships
- Oil prices: Brent or WTI; EIA high/low/reference price cases; gas/oil price differential
- Petroleum production: recoverable amounts from Bayu-Undan and Sunrise
- Greater Sunrise development: when and if it is developed, where the LNG Plant is, and how revenues are shared with Australia
- Return on Petroleum Fund investments
- Domestic revenues, including recovery of fuel costs for generating electricity
- Recurrent expenditure, including maintenance of capital investment
- Capital expenditure: Port, airport and Tasi Mane projects components: inclusion and costs
- Loans: existing, planned and possible for projects and deficit, including amounts, interest and repayment periods
- Ministry of Finance “Yellow Road” and other sustainable scenarios from the MoF and elsewhere
The PowerPoint includes examples of comparisons with the Reference Case
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| La'o Hamutuk suggests a more achievable path than the "Yellow Road" suggested by the Ministry of Finance, which might allow enough time to develop Timor-Leste's non-oil economy in a sustainable way. It will require significant policy changes. |
- Without Greater Sunrise
- With higher B-U prices and production
- Higher Petroleum Fund return (8%)
- Lower Petroleum Fund return (4%)
- Recover 80% of EDTL fuel costs
- Cancel Tasi Mane project (Suai Supply Base & highway)
- Full Tasi Mane project (including refinery but not LNG plant)
- Finance full Tasi Mane project with loans
- Increase revenue growth (from 10% to 13%)
- Reduce spending growth (from 15% to 12%)
- MoF “Yellow Road” - impossible
- LH Yellow Road: ESI + domestic revenues + capital + maintenance
Further analysis
La'o Hamutuk will continue to refine this model, with deeper analysis and incorporating new information and ideas. Possible enhancements include:- Other capital investment decisions and projects
- More refined recurrent spending projections, including pensions
- Possible future oil and gas discoveries
- Links between human & physical investment and revenue growth
- Baby boom population dynamics
- Impact of local inflation
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