19 March 2012

Timor-Leste is going for broke.

During the last few years, Timor-Leste’s state expenditures have grown rapidly.  Bayu-Undan oil production has passed its peak, Petroleum Fund investments are returning less than we would hope, our private-sector economy remains tiny, prices and population are rising, and we are taking out foreign loans. If we continue on this path, by 2022 our Petroleum Fund will be empty, our oil will be almost gone, we will be repaying the principal on infrastructure loans, and twice as many young people will be entering the work force as today. Our non-oil economy may be larger than it is now, but it will almost certainly not be able to provide revenues to cover our expenses.

Timor-Leste is heading toward financial disaster. With the conservative assumptions in the above graph, we will be spending more than we receive from petroleum and investment income in two years, and will have used up the entire Petroleum Fund in ten. How will we able to pay for public services like education, health care, local infrastructure, police, courts and public administration? How will old people and veterans live when there is no money for cash transfers?

As frightening as the above graph is, it is more optimistic than current reality:
  • The state budget has actually gone up by more than 40% per year since 2010 (34% in 2012), but the graph assumes annual increases of only 14% after 2013, and 11% after 2025,
  • Domestic revenues have increased 16% per year since 2010 (12% in 2011), but the graph expects them to go up by 25% per year after 2013, which will require both rapid economic growth and increased tax collection.
  • Even though Timor-Leste and the oil companies have not yet agreed on how to develop the Greater Sunrise gas field, the graph assumes that Sunrise is developed soon with a pipeline to Timor-Leste and an LNG plant in Beaçu paid for by the companies.
  • The graph assumes that investing the Petroleum Fund will earn 4.0% annual return, even though its best returns so far have been around 3.6%.
  • The graph assumes only the loans discussed in the 2012 State Budget, none after 2016. The borrowed money is considered as part of State Revenues and expenditures (i.e., projected budgets aren’t enlarged by borrowed money), although loan repayments are added to state expenditures.
  • After the Petroleum Fund is exhausted, the State will have an annual budget gap, as shown by the red line. The graph does not include repayments if this deficit is filled with borrowed money.
  • The graph is in nominal dollars – that it, it does not consider inflation. If prices in Timor-Leste continue to rise at recent rates of more than 15%/year, the State Budget will probably go up even faster.
If we run this model with assumptions closer to recent history, with annual budget increases of 30%, annual increases in domestic revenues of 22%, Sunrise further delayed, and 3.6% earnings on Petroleum Fund investments, the Fund will be used up four years sooner, in 2018. By 2025, we will have accumulated a deficit of $162 billion!

However, nobody will lend Timor-Leste that much money, especially since we will have shown that we are incapable of managing it. The more likely scenario is that in 2018 the state will be unable to cover its budget and pay back existing infrastructure loans, and we will be forced to drastically cut education, health care, public sector salaries, infrastructure maintenance, and all other services. Poverty will increase, we will not have money to import our everyday needs, and people will starve.

If we do not change our direction, and soon, we are likely to end up where we are headed.

La’o Hamutuk is sad that Timor-Leste is using up its oil and gas wealth so quickly, and does not want our country to rush over this cliff. We hope we have made a mistake in this analysis, and we encourage you to test this model with your own assumptions. Please download the spreadsheet that generated these graphs and tell us where we went wrong. Thank you.

Addendum, 24 March 2012: The spreadsheet model mentioned in the previous paragraph includes cells (B16 through B29 on the "DATA" worksheet) where you can change assumptions -- state expenditures growth rate, domestic revenues growth rate, return on Petroleum Fund investments, whether Greater Sunrise is developed, and borrowing to fill the budget gap -- to see how they affect the outcomes. As originally posted, the assumptions included were as mixture of those in the two graphs above, which confused at least one reader. We have reposted the Excel file with the assumptions as listed in the first graph above, which are more optimistic.  If you want to make it closer to recent actual figures, you can replace the numbers in these cells with those described in the second graph, or with any others you want to explore.

Addendum, 30 May 2012: In response to comments that we were too pessimistic, we re-calculated this model using more optimistic assumptions of future oil selling prices. These imprudent projections, described in another blog posting, extend the Petroleum Fund's life for less than a decade.


  1. John Waddingham21 March, 2012 07:22

    I too hope you have made mistakes, LH. I have no doubt the maths are correct but your (conservative scenario) assumption of 14% annual growth in government expenditure looks to me to be the critical issue. I would be interested to see a graphic projection based on government expenditure matching petroleum revenues. Admittedly the past two years budgets have shown enormous increases but your graph suggests both have been below annual Petroleum revenues. I struggle to understand the current government's approach to expenditure but I can see how it might be attracted to a somewhat politically defensible investment in infrastructure etc at a level close to the annual earnings of the Petroleum Fund.

    Broadly, though, of course I agree with your main message. It is imprudent, to say the least to be borrowing money and spending money at a rate that is simply unsustainable. That is too much of a gamble. Lets hope it doesn't happen.

    1. Thanks, John. Your suggested scenario would be appropriate if petroleum revenues were going to continue to increase. However, Bayu-Undan has already passed its peak production, and revenues will decline steadily, reaching zero in about a dozen years (Kitan is empty about five years before that). The Government's own projections (tables 2.2 and 5.6 in Book 1 of the 2012 Budget) show state expenditures virtually equal to petroleum revenues (in which they include PF investment return) in 2013, and exceeding them in 2014. [Past gov't budget projections for future years have always been far below what actually happened. I cite them here only to show that it will not be possible to keep expenditures the same as (declining) petroleum revenues in the future.] Hence the need to develop other sectors of the economy.

  2. the vast majority of oil and gas resources in the timor sea need to be extracted. these resources are currently the most productive and viable which could kick start the nation economy for now and determine the nations future economy. we have to see from the timorese prospective to understand the current sosio political economy of the nation prior to defining any projection analysis relating to the government budget expenditure as presented.Raising the budget to the near maximum of the petroleum fund platform is needed to create condition for the timorese people such as facilitating and capacitating the timorese public institution personnel, timorese owned private firm and the need of funding other investment project for releasing our future reliance on the oil and gas industries as well as reducing the need of hiring more of internasional advisors. the first principal of the productivity is the learning proses, we need to spend to learn and once the learning process is due next come the stable period where the economy is mature, meaning we have a more productive public institution staff and competent private firm. Learning period does not come any cheaper as we know of, most of the time the timorese are denied of their rights to reclaim their resources and the so called assistance or help given to the timorese as more with the tendency of creating dependency rahter than helping the timorese to stand on its own. The government have taken the extreme measure to fast paced the economy condition as to stabilize the nations development needs for start as it has always been, one has to first rely on its own capacity then once it has reached the economic threshold point, the future budget will be then forecasted as in proportionate to the national income revenue, it take years to realize this outcome, but they will get there. All the government have to do now is identified those timorese who are capable of running and executing government project, identified those competent timorese owned private firm and establish good partnership with competent international to reduce and erradicate corruption and collution scheme in the country.

  3. 'Timor-Leste is heading toward financial disaster'. If TL not able to finance itself in years to come then lets sell it off to other wealthy nations like china, USA, Australia or whoever has got money! Then each of us just run off and hoping for the best !!!!

    As timorese so sad to see the current generation not brave enough to challenge hurdles ahead of us now and always assume the future will be doing ok on this matter.

  4. In my opinion, Xanana is a great political leader. There is no doubt that Xanana and Ramos Horta succeeded in securing peace in recent years. However it is very important to remember that FRETILIN made a great contribution to ensuring peace. Everyone knows that FRETILIN is the political party that has more members and followers and was the most voted party in legislative elections. That is, their power is indisputable. So there was peace in Timor because the FRETILIN leaders gave more importance to the stability of the country than to power.
    Now we try to evaluate the governance of Xanana. This government found that some ministers and secretaries of state were efficient but in key areas such as education, health and the state structures failed. In these areas was much to do. The government has pledged to peace but this had a very high price: corruption. The fact that the government is composed of several coalitions to Xanana did not dismiss the possibility of corrupt ministers immediately on behalf of government stability.
    If Xanana is elected after the next election so this is what will happen: high levels of corruption and bad governance in the areas most important for the country: health, education and structures.
    If the ruling FRETILIN then we know that they will manage well the money because they have ruled the country in the past with smaller budgets of state (without oil revenues) that East met and held up very well. On the other hand, it also proved to be more dynamic in the creation of projects for sustainable development of the country. With regard to peace, stability is FRETILIN rule with the opposition parties do the same and Xanana FRETILIN is doing at the time: let the government govern.
    As for Lassama, I can not comment because he has not shown anything as governor. Only he served as President of the Assembly of the Republic of TL. You can only comment on what he does outside Parliament with alcohol (it is public knowledge).

  5. Fretilin "managed" well the country because at that time they have nothing to manage. So, i think they will doing the same thing if they are get elected this year.

    1. Very well said! Could be wrost if they managed something! But they did nothig! All of the "governacao aberta' was bullshit! And Marie Alkatiri - from how he lives now - is one of the most corrupt governants Timor-Leste ever had!

  6. In response to suggestions that this model is too pessimistic, we re-did it with imprudent higher oil price projections from the Reference and High cases of the U.S. Energy Information Administration, which you can see at
    http://laohamutuk.blogspot.com/2012/05/how-timor-leste-got-ten-billion-dollars.html. Higher oil revenues will make the Petroleum Fund last two to seven years longer, but it stills runs dry in less than one generation.