Financial Institution Risk Assessment Tools in Timor-Leste

The financial landscape of Timor-Leste remains challenging, with a high-risk political and economic situation affecting corporate payment behavior. According to Coface, the corporate default probability is extremely high.

Strengths and Weaknesses

Despite some strengths, including oil and gas reserves, a sovereign wealth fund, and total dollarization limiting inflationary risk, Timor-Leste faces significant weaknesses:

• Natural Disasters: Vulnerability to natural disasters
• Underdeveloped Infrastructure: Limited infrastructure development
• Dependence on Oil Revenues and Food Imports: Very high dependence on oil revenues and food imports
• Human Capital Deficit: Deficit in human capital

Economic Outlook

Economic growth is expected to accelerate in 2022 with the gradual lifting of the state of emergency and recovery of agriculture after recent cyclones and floods. The main drivers of growth are:

• Public Investment: Public investment will drive growth, mainly in infrastructure improvements and tourism development
• Oil Sector: The oil sector will also boost GDP growth through an infill drilling campaign led by Australian company Santos

Risks and Challenges

However, twin deficits are financed by the Petroleum Fund, which is unsustainable as it uses excess withdrawals to finance public spending. Additionally:

• Current Account Deficit: The current account deficit will increase in 2022 due to a large trade deficit, driven by imports of capital goods and cereals
• Political Instability: The country’s political scene remains fragmented, with periodic power-sharing arrangements and hotly contested elections ahead in 2022, which could lead to instability and fractious governance

Creditworthiness Assessment

Financial institutions must take into account these risks when assessing creditworthiness in Timor-Leste.