Author: Damien Kingsbury, Deakin University

Timor-Leste is a country increasingly able to stand on its own two feet. At least, that is the sense within Timor-Leste. The success of Timor-Leste’s presidential elections in March 2017 and the prospect of successful parliamentary elections again in early July have marked the country as a consolidating democracy in a region where such notions are often compromised.

Timor-Leste believes it no longer needs propping up by the international community as it did during its independence struggle of 2002, and again following the violence and destruction of the 2006 political crisis.

But Timor-Leste’s key social and economic indicators don’t match up with this growing sense of independence within the country.

Many of the country’s problems stem from the oil industry. When former president Xanana Gusmao won Government in 2007 with a coalition led by the National Congress for Timorese Reconstruction (CNRT) party, he managed to cash in on then booming oil prices. Timor-Leste’s huge oil income allowed him to buy the country out of trouble. But the country is still heavily reliant on these oil revenues.

At its peak, Timor-Leste’s sovereign wealth Petroleum Fund amounted to US$16 billion. The plan was for the government to only use interest from the fund to underwrite government activity. But now over 90 per cent of Timor-Leste’s economy is supported by Petroleum Fund revenues, making it amongst the world’s most oil-dependent states.

Another area of concern is the government’s ambitious infrastructure projects. The government’s initial goal was to provide electricity to 80 per cent of Timor-Leste and then repair and rebuild the country’s roads that were damaged by neglect and seasonal rains. But government spending has quickly spiralled to double the sustainable rate of withdrawals from the Petroleum Fund.

The post-2007 government also began a ‘selective tendering’ process to address emergency issues, through which all tenderers who met government criteria were automatically awarded contracts. But what was supposed to be an emergency measure has now become standardised, with competitive tendering largely being disregarded.

As a consequence, corruption has set in. Government tenders were initially overpriced and companies with close connections to senior government members disproportionately benefitted from government business. These issues only worsened after the 2015 ‘government of national unity’ was established, bringing the major opposition party — Fretilin — into coalition with the CNRT.

With both major parties now sharing the spoils of government, there is even less accountability. Oligarch’s known as the ‘Forty Families’ have now risen, controlling the lion’s share of Timor-Leste’s economy.

Meanwhile, median standards of living are still low. Immediately after 2007 there were significant improvements, with greater access to food leading to increases in average life expectancy and a halving in maternal and infant mortality rates. But those improvements have not been built upon.

Looking to the future, the current government has pinned its economic hopes on the development of the Greater Sunrise liquid natural gas (LNG) field in the Timor Sea. Much of the Greater Sunrise Field lies outside of the joint petroleum development area that Timor-Leste receives 90 per cent of its revenues from.

Australia had agreed to split the proceeds of the Greater Sunrise field evenly with Timor-Leste. But Timor-Leste has started arbitration over the Timor Sea, with the matter now before the Permanent Court of Arbitration. Timor-Leste is hoping for an outcome that establishes an equidistant boundary between the two countries.

If the outcome of arbitration goes in Timor-Leste’s favour — and the re-aligned lateral boundaries adhere to the UN Convention on the Law of the Sea — Timor-Leste will gain complete control of the Greater Sunrise field.

Yet at this stage the lead joint development partner — Woodside Petroleum — has no interest in acceding to Timor-Leste’s demands to develop an LNG processing site on its south coast. Woodside prefers a floating processing platform option, or linking to the existing oil processing infrastructure leading to Australia, which is coming into disuse as existing oil fields deplete.

Even if an agreement over the Timor Sea is reached quickly and a willing development partner is found, Timor-Leste wouldn’t receive any profits from the Greater Sunrise field for another six to seven years.

This would be too little, too late. At current rates of government spending, Timor-Leste is expected to be broke within a decade. Even if spending is reduced, which the last budget suggested, things don’t look good for Timor-Leste’s economy.

Either way, Timor-Leste is likely to face at least significantly reduced spending in the short- to medium-term, or financial collapse over the medium- to long-term. Both scenarios will have deeply negative consequences for such a resource-dependent economy.

Timor-Leste bought itself out of trouble under former president Gusmao. With careful management and a lot of luck it might stave off the worst of the imminent financial tightening. If it does not manage this, the booming youth population will enter a workforce devoid of jobs, presenting another momentous challenge for Timor-Leste’s future governments.

Damien Kingsbury is Professor of International Politics at Deakin University.