Timor-Leste, a small nation heavily reliant on oil, finds itself in a delicate position, grappling with economic downturns adn dwindling resources.
In a nutshell
Table of Contents
- Oil production declines threaten Timor-Leste’s economic stability
- Youth unemployment and poverty remain deeply entrenched
- Political elites criticized for lack of economic diversification
timor-Leste, also known as East Timor, is one of the world’s youngest countries. As of October this year, it has officially become the newest member of the Association of Southeast Asian Nations (ASEAN), bringing to fruition a 13-year journey and signifying the nation’s full integration into Southeast Asia’s political and economic landscape.
The island nation has endured a turbulent history: centuries of colonial domination, a brutal 24-year Indonesian occupation and, as independence, a heavy dependence on oil wealth that has shaped both its fortunes and its vulnerabilities.
The Portuguese connection
Portuguese explorers,traders and missionaries first reached the remote island of Timor between 1512 and 1515.Throughout the 17th and 18th centuries, the island became a stage for conflict among the Portuguese, the Dutch and local microkingdoms vying for control of the territory. In 1859, the Treaty of Lisbon was signed, dividing Timor: East Timor (Portuguese Timor) was assigned to Portugal, while West Timor was assigned to the Netherlands. West Timor has been part of Indonesia since 1949.Throughout much of the colonial period, Portuguese Timor was not governed directly from Lisbon but was administered through its other Asian territories – first from Goa (in India) and at times from Macau (in china).Direct rule from the Portuguese capital only became the norm in the late 19th century. Timor-Leste became a site where various portuguese governments, across different political regimes, deported their political opponents.
During World War II, Portugal chose to remain neutral, but as Australian and Dutch forces took control of the island, the Japanese also invaded and occupied Timor-Leste (East Timor). This invasion sparked a wave of resistance, uniting both the Portuguese and the local inhabitants. After the war, Timor-Leste returned to Portuguese rule, and the situation remained fairly calm until the military coup in Lisbon on April 25, 1974.
Facts & figures
Timor-Leste
The risks of an oil-dependent economy
Independence, however, brought new challenges. Timor-Leste is now ASEAN’s poorest member: 42 percent of its people live below the national poverty line, chronic malnutrition affects nearly half of all children under five and almost two-thirds of its 1.4 million citizens are under 30, creating enormous pressure for jobs and services.
Timor-Leste’s economy remains heavily dependent on oil and gas revenues. But it is indeed currently facing formidable economic hurdles as it seeks to diversify and build lasting growth beyond its depleting offshore fields. The output has dropped to under 50,000 barrels per day and is continuing to decline. The bayu-Undan field, which peaked at 114,000 barrels per day in 2019 and had been the backbone of Timor-Leste’s oil revenue for two decades, permanently ceased production in June of this year.
This could have been even more disastrous were it not for the government’s prudent decision in 2005 to establish the Timor-Leste Petroleum Fund. This sovereign wealth fund manages surplus revenues from the oil and gas sector, and as of October, its assets are valued at $18.8 billion.
One of the greatest concerns for a small country surrounded by bigger players is managing its foreign relations and strategic alignments.
Despite the traumatic past, Timor-Leste has built warm relations with Indonesia, especially on the economic front. The fall of Suharto’s dictatorship marked a pivotal moment in the struggle for timorese independence. Suharto’s immediate successor, President B.J. Habibie, laid the foundation for improved relations. Efforts toward reconciliation were pursued through the Commission of Truth and Friendship, which operated until 2008.
Dili’s political elite took a pragmatic approach, choosing not to dwell on revenge toward their powerful neighbor. Observers note that this realism has benefited both nations: Timor-Leste could not afford a conflict with Indonesia, while Indonesia had a vested interest in maintaining Timor-Leste’s political and economic stability.Timor-Leste’s long-awaited accession to ASEAN largely depended on Indonesia’s persistent diplomacy, with Jakarta actively lobbying other member states to gain consensus. Singapore initially opposed the bid, arguing that Timor-Leste was not yet ready to meet the institutional and administrative demands of full ASEAN membership.
Timor-leste’s Economic Future Hinges on Greater Sunrise Gas Field and Diversification
In November, Timor-Leste formally invited ASEAN investors to participate in developing the Greater Sunrise gas field, emphasizing that gas processing and pipeline construction should occur within the country to maximize economic benefits and job creation.
The hope for the country’s future lies in this project, alongside efforts to diversify the economy and restore agricultural production. This includes prioritizing investments in sustainable agriculture, such as high-value crops like coffee, vanilla and coconut products, as well as building resilient food systems. There is also a focus on ecotourism and the emerging “blue economy,” which emphasizes the sustainable development of ocean and coastal resources. Without these initiatives, the Timor-Leste Petroleum Fund is projected to run out in around 10 years.
Scenarios
Likely: Slow transition beyond oil
The primary challenges facing Timor-Leste revolve around its economic future, which is crucial for the nation-building process. Given the issues and risks associated with the local petro-economy, the best course of action is centered on one key concept: diversification. This diversification, which includes investments in agriculture, ecotourism and the blue economy, can be financed by the remaining substantial resources of the Petroleum Fund. Additionally, collaborating with Australian and Japanese partners on the development of the Greater Sunrise gas field can further boost the economy.