East Timor, Asia's Newest Country, May Grow Fastest (Update1)

By Michael Dwyer

March 30 (Bloomberg) -- East Timor, Asia's newest nation, may be the region's fastest-growing economy this year, according to the Asian Development Bank.

The $334 million economy, less than 1/1000th the size of neighboring Indonesia's, is forecast to expand by 32.1 percent in 2007 after contracting 1.6 percent last year, the Manila- based lender said in its latest Asian Development Outlook report. Azerbaijan is expected to be No. 2 with 25 percent growth.

More than 2,000 United Nations peacekeepers are deployed in East Timor as the nation, which declared independence from Indonesia in 2002, struggles to cope with fighting between security force factions and gang violence. Their spending is propping up the economy by generating ``high demand'' for housing, goods and services, according to the ADB.

``A sharp rebound is projected for 2007, based on increased spending by the government and by international personnel deployed in the country,'' the ADB said. ``Achieving development objectives hinges on the state's ability to translate a strong flow of oil and gas reserves into capital spending.''

East Timor, a country of about 1 million people located around 500 kilometers (310 miles) north of Australia, is one of the poorest in Asia. Gross domestic product per capita was $347 in 2006, according to International Monetary Fund estimates. Only Myanmar and Nepal had lower levels.

Oil Revenue

East Timor's parliament last month ratified an agreement with Australia to split royalties from the Greater Sunrise gas field in the Timor Sea, operated by Australia's Woodside Petroleum Ltd.

The Greater Sunrise field could start production in 2013 and generate $10 billion in revenues over its productive life, this week's ADB report said.

``The Timor Sea has other potential fields that are under 100 percent Timorese jurisdiction,'' the ADB said. ``Oil and gas income is projected to more than double in 2007-2008 as production from existing fields increases.''

Revenue from the oil and gas industry may provide the government with the money needed to fund development spending and reduce ``severe poverty,'' the ADB said.

East Timor's economy contracted last year, after expanding an estimated 2.3 percent in 2005, amid an upsurge in violence that has killed 37 people and forced about 155,000 from their homes in the past 12 months.

``The civil unrest, which occurred at the peak of the coffee harvest season, damaged production,'' the ADB said. ``Public investment projects were suspended and commercial activity was heavily restricted.''

Refugee Camps

Clashes between armed gangs in the capital, Dili, drove 5,000 people into refugee camps last month, Michele Montas, a spokeswoman for UN Secretary-General Ban Ki-moon told reporters in New York on March 21.

The UN last month extended its peacekeeping mission in the country to February 2008 to cover the country's first parliamentary and presidential elections since independence. The first round of the presidential ballot is scheduled for April 9.

Strong demand by UN peacekeepers for housing and transportation, as well as restrictions on the supply of goods amid the violence, has pushed inflation higher.

East Timor's consumer price index accelerated to about 6 percent from June through December after rising by less than 1 percent in early 2006, the ADB said. Inflation in 2007 is expected to be 5 percent.

The UN has been operating in East Timor since 1999, when East Timorese voted for independence after a 24-year occupation by Indonesia, which invaded the territory when it was a Portuguese colony in 1975.

Asia's developing economies are expected to expand 7.1 percent this year, slowing from an 8.3 percent pace in 2006, according to the ADB. That would be the slowest in four years.

East Timor's growth rate may slow to 3.5 percent in 2008, the lender said. UN peacekeepers are scheduled to stay in East Timor until February 2008.

To contact the reporter on this story: Michael Dwyer in Singapore <mailto:mdwyer5@bloomberg.net>mdwyer5@bloomberg.net

Last Updated: March 30, 2007 00:34 EDT