Table 1.2 shows the estimated development of the Petroleum Fund and CFET Balance, pending a decision as to how much to transfer to the Petroleum Fund on 1 July, 2005.
As always, these estimates are subject to risks and uncertainties. The greatest uncertainties lie with world oil prices and with expenditure commitments by Development Partners for Bilateral/Multilateral programs.
For example, in 2004 world oil prices fluctuated between $32 and $56 or within a $24 band. This high level of volatility has very serious consequences for Timor-Leste. Chart 1.1 shows fluctuations in world oil prices and the assumption underlying the revenue estimates in the 2005-06 Budget. Importantly, it illustrates the large risks concerning future movements in world oil prices, with the likelihood that oil prices could be much higher or much lower than assumed.
Table 1.3 shows that a High Case scenario, where prices are just $5 higher than assumed for the Base Case, would lead to very large fiscal surpluses. However, it also shows that in a Low Case scenario, where prices are just $10 lower than the Base Case,. there would be only small fiscal surpluses which would then mean that expenditure policies would be unsustainable and the Government’s fiscal strategy would need to be revised.
POSITION OF THE GENERAL BUDGET OF THE STATE
The most significant developments in the medium-term State Budget position since the 2004-05 General Budget of the State arise from the significantly higher levels of petroleum revenue into the Petroleum Fund. This initiates strong growth in State Budget expenditure, a closing of the State Budget deficit shown in the last General Budget of the State and significant savings in the Petroleum Fund. The medium-term State Budget position is shown in Table 1.5.
State Budget revenues are now estimated to be much stronger than before, as discussed in Part 4. This is due to stronger petroleum revenues. Stronger petroleum revenues arise from high world oil prices, with prices now above $50 per barrel after fluctuating between $32 and $56 per barrel since the start of 2004. Further, markets now expect the future oil price to be much stronger than previously, with markets expecting the oil price in 2010 to be about $38 at the time of forecasting, which is higher than $28 as expected a year ago.
The Government’s policy is to spend, but to spend wisely. With higher petroleum revenues, an increase in State Budget expenditure is planned. For example, it will increase from $79m in 2004-05 to $109m in 2005-06, which is an increase of over 35%. The Government plans to review and update its expenditure decisions in the Mid Year Review and future Budgets with the intention of increasing expenditure over the medium term to its sustainable level.
SAVINGS POLICY AND PETROLEUM FUND
Most resource-rich developing countries have suffered from the “resource curse”. One mistake that these countries have made is to spend all their revenue as it arrives, which leaves them with no saving for the future and with expenditure levels that fluctuate with commodity prices.
The Government is determined to avoid repeating the mistakes of other resource-rich countries. Instead, it has adopted a savings policy and is creating a Petroleum Fund to hold and manage its savings of petroleum revenues. The key to the Timor-Leste savings policy is that actual expenditures should adjust over the medium-term to the sustainable level of expenditure. This sustainable level is based on estimated current and future petroleum revenues. It is the level of expenditure that can be sustained indefinitely, including increasing with inflation. Chart 1.2 compares petroleum revenue excluding interest to the level of sustainable expenditure from petroleum revenue.
The largest event to affect GDP in 2004-05 is the commencement of production in the Bayu Undan petroleum field. This new field is much larger than the EKKN field. It commenced production in the second half of 2003-04 and has been in full production for all of 2004-05. Accordingly, preliminary estimates indicate that the Oil sector will grow significantly in 2004-05 to be about twice the size of Non-oil GDP.
This growth in the Oil sector is likely to have little effect on Non-oil GDP. Instead, Non-oil GDP growth in 2004-05 can be analysed in terms of its component Food, Government and Private sectors.
Table 3.3 contains estimates of real GDP growth rates, including for its oil and non-oil components. Table 3.4 contains the estimated levels of nominal GDP. While a great deal of uncertainties surrounds all these estimates, the estimates for Oil GDP are very preliminary.
While Table 3.3 shows large increases in Oil GDP, Oil GDP will have little direct effect on the well-being of the Timorese people. That is because few Timorese will be employed directly on the Bayu Undan field or sell to the petroleum sector. However, the Oil GDP will make a very large but indirect contribution to employment, income and poverty reduction in Timor-Leste because it provides large petroleum revenues to the State. The spending of those petroleum revenues will create jobs and provide incomes to the Timorese people. It is this indirect effect that will make a major contribution to poverty reduction.
The risk that is easiest to identify and quantify is the risk to revenue caused by changing world oil prices. This risk is illustrated using scenario analysis of different world oil price assumptions. In the last ten years world oil prices have moved within a $46 band, from $10 to $56, and in 2004 alone they moved within a $24 band, from $32 to $56. Given these large historical movements, the $15 difference between the High Case and the Low Case is modest. The High Case and Low Case do not reflect the maximum or minimum revenues possible, but rather indicate the likely fluctuations that could occur.
In the financial year 2005-06 Timor Leste revenue is expected to decrease in comparison with the previous financial year. In 2005-06 it is predicted that world oil prices will drop.
Petroleum Revenue is expected to experience a significant increase over the medium term. The increase in Timor Leste revenue is due to:
However compared with the MYR 2004-05, Estimated Timor Sea Revenue started to indicate an upward shift due to an increase in world oil prices, as shown in Chart 4.1. This is positive for Timor Leste in designing and supporting a sustainable, sound development plan program. The increase in world oil prices is due to a number of factors;
Therefore, estimated Petroleum Revenue for the medium term will be significant. It will amount to a total of $744.1m, in comparison with the estimated revenue in the 2004-05 MYR of $546.6m (and the original Budget 2004-05, which estimated a mere total of $269.7m originating from the Timor Sea). In the following years, estimated Timor Sea Revenue is expected to increase, including when LNG production and Profit Oil payments will start. Chart 4.2 shows the long term estimate of petroleum revenue over the next twenty years.
World oil prices are the key risk for oil producing countries. Currently oil producing countries are currently delighted with the receipt of revenue in excess of predicted targets due to high oil prices which will continue in the medium term.
However these estimates can be uncertain as world oil prices are always in a state of fluctuation. With a sustained increase in oil prices over each subsequent year then these countries can undertake development in sectors prioritized by their government and significant amounts of money can be placed in savings for the next generation. If world oil prices decrease to a low level, then oil producing countries will face difficulty in planning development in their respective countries.
Currently the Government of Timor Leste is preparing Estimates on Timor Sea Revenue through the use of three scenarios;
These scenarios are based on oil prices in the world market (NYMEX) with estimates for the Base Case $5 lower than NYMEX prices. The High Case is $5 higher than the Base Case and the Low Case is $10 lower than the Base Case. From these scenarios, the Base Case scenario is used each year in the Government Budget. However, the Base Case scenario used by the Government of Timor Leste still contains a discount of 15%, to provide security for the planning of the annual Government Budget of the State.
There are two scenarios from the table above that will have significant implications for Timor Leste Revenue. The High Case Scenario indicates that an increase in oil prices will have a large impact on Timor Sea Revenue and the Government will be able to place significant savings in the Petroleum Fund account for the next generation. Whereas the Low Case Scenario shows low revenues so the Government will not have any surplus to place in savings as revenues would be lower than expenditure.
For 2005-06, the estimated sustainable expenditure level is about $150m. This comprises non-petroleum revenues of $47m plus estimated sustainable income from petroleum revenues of $103m. The estimated sustainable petroleum income is equal to three per cent of petroleum wealth, where estimated petroleum wealth is $3.4 billion.
Table 5.2 shows the steps involved in calculating petroleum wealth. It shows the petroleum revenues (excluding interest) for each year. It also shows the value of those revenues after discounting future revenues by 5.5 per cent for every year in which they lie in the future. Table 5.2 also shows the totals. The total of the discounted revenues is the value of the petroleum wealth of Timor-Leste.
The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)