Financial Crime World

Risk Assessment for Financial Institutions in Timor-Leste

A high-risk political and economic situation in Timor-Leste poses significant challenges to corporate payment behavior, with a high default probability. The business environment is difficult, with unreliable financial information and unpredictable debt collection.

Strengths

  • Oil and gas reserves in the Timor Sea
  • Sovereign wealth fund equivalent to 1200% of GDP
  • Total dollarization limiting inflationary risk
  • Support from the Community of Portuguese-Speaking Countries
  • Attractive tourist destination

Weaknesses

  • Vulnerability to natural disasters such as landslides, typhoons, and floods
  • Underdeveloped infrastructure
  • High dependence on oil revenues and food imports
  • Deficit in human capital
  • High unemployment rates among young people

Timor-Leste’s economic growth is supported by the rebound in public investment. In 2021, the country saw a partial recovery in consumption and higher oil revenues, leading to accelerated growth.

Economic Growth

  • The economy will continue to grow in 2022 with the gradual lifting of the state of emergency and the recovery of agriculture after Cyclone Seroja and flash floods.
  • Public spending is expected to increase by 30% over three years, financed mainly by the Petroleum Fund and international aid.

Twin Deficits Financed by the Petroleum Fund

The government’s management of the Petroleum Fund is also a concern, as it uses the fund to finance a significant portion of public spending. Although withdrawals from the fund are limited to 3% of estimated wealth, excess withdrawals do take place.

Concerns

  • The current account deficit will increase in 2022 due to the large trade deficit.
  • The use of the Petroleum Fund to finance public spending is unsustainable.

A Fragmented Political Scene Featuring Periodic Power-Sharing Arrangements

Timor-Leste’s political scene is fragmented, with periodic power-sharing arrangements. In 2020, a new coalition government was formed, comprising four parties. However, the next presidential election in 2022 and parliamentary election are expected to be hotly contested between Fretilin and the main opposition party CNRT.

Regional Relations

After numerous disputes over the maritime border with Australia, the two countries adopted a treaty in 2019 resolving the matter of the Greater Sunrise oil and gas field. Timor-Leste’s application to join ASEAN is still under negotiation.

Conclusion

Overall, Timor-Leste poses significant risks for financial institutions due to its challenging political and economic environment. However, the country also has some strengths that could provide opportunities for growth and development with careful management.