Country Risk Rating

The highest-risk political and economic situation and the most difficult business environment. Corporate default is likely. - Source: Coface

Business Climate Rating

The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.


  • Oil and gas reserves in the Timor Sea
  • Supported by the Community of Portuguese-speaking countries
  • Attractive tourist destination (protected natural sites, rich cultural heritage) 


  • Vulnerable to natural disasters (landslides, typhoons, floods)
  • Underdeveloped infrastructure
  • Human capital deficit
  • Very heavily dependent on oil income (98% of exports)
  • Almost half the population lives below the poverty threshold
  • High unemployment among young people (40%)
  • Weak bank intermediation 

Current Trends

Public Investments Support Growth and Economic Diversification

In 2018, non-oil economic activity is expected to accelerate after slowing slightly in 2017. Growth will be driven by domestic demand and in particular by public investment. This is because the country is switching to a more diversified economy against a background of lower hydrocarbon production and reserves. This diversification takes place in the context of the Strategic Development Plan (2011-2030) built around four main pillars, namely health, infrastructure (telecommunications, energy, water supply, and treatment), the high growth potential sectors (agriculture, tourism, and petrochemicals) and the institutional framework so as to improve governance. The tourism sector has great potential in this country, endowed as it is with protected natural sites. Nonetheless, infrastructure shortcomings are still adversely impacting tourist visits. In this regard, the country can rely on its large oil fund (USD 16.9 billion in 2017). Moreover, these public funds are expected to stimulate a quasi-non-existent private sector, which is struggling to develop in a country where public spending represents almost 60% of GDP. The government is also seeking to attract foreign capital, as with the country’s first public/private partnership in June 2016 (construction of the new Tibar Bay port). Private consumption will be sustained by infrastructure development, which should help create jobs in construction, with 65% of the workforce depending on the agricultural sector (27% of GDP). Meanwhile, inflation is historically volatile in Timor-Leste, because of the country’s exposure to changes in food and oil prices. It is expected to rise in 2018, because of momentum in domestic demand and the modest rise in the oil price.

Large Twin Deficits

The 2017 fiscal balance was in positive territory due to a correction to the 2016 budget, to which a certain number of infrastructure investments were allocated. However, the fiscal deficit is expected to be very significant in 2018 as a result of the fall in oil revenues, as well as new massive public investments, especially in roads and other transport infrastructure (40% of total budget). As a result, withdrawals of capital from the oil fund are expected to increase, taking the fund from USD 17 billion in 2017 (four times GDP) down to 4 billion in 2021. The main risk is the wasteful funding of “white elephants” as with the new port now under construction. Meanwhile, the spending allocated to health and education (15% of the budget) and to welfare (14% of the budget) is not expected to increase substantially.

The current account balance is expected to show a large deficit linked to the deepening deficit in goods and services. Exports of goods, mainly coffee, and remittances from expatriates are expected to edge upwards in 2018, while imports are expected to grow strongly because of needs relating to infrastructure spending. In order to finance the current account deficit, the country is expected to continue drawing on its oil fund and benefitting from FDI flows.

A Fragile Government Coalition Facing a Maritime Dispute with Australia

The July 2017 parliamentary elections put the Revolutionary Front for an Independent East Timor (Fretilin) ahead with 29.7% of the votes, followed closely by the National Congress for Timorese Reconstruction (CNRT) with 29.5%. This narrow victory resulted in the CNRT refusing to join a government led by the Fretilin, although a government coalition had been in place since 2015. An agreement with the Democratic Party helped to form a minority government led by Mari Alkatiri, already Prime Minister from 2002 to 2006. Nevertheless, the new government is facing stiff opposition to its investment programme (2017-2022) and could be toppled if its programme is rejected a second time, thus triggering early elections or the formation of a government by the CNRT. Meanwhile, the effectiveness of the government’s actions is regularly challenged by the population, and poverty continues to be very significant. While the vast majority of Timorese still live in rural areas and depend on agriculture, the government has not succeeded in stimulating the private sector.

Externally, the country’s relations with Australia are tense, because of the dispute over the maritime border in the Timor Sea. The previous agreement, which dates back to 2006 (valid for 50 years) was terminated in January 2017 by Timor-Leste, on grounds that the agreement on sharing the offshore oil fields was unfair. A more advantageous agreement could help delay the shortages the country will be facing and increase the country’s oil fund revenues. While the two parties have come to an agreement in principle in September 2017, the outlines of this arrangement could take longer to negotiate.


Coface (01/2018)