MSMEs can boost Timor-Leste growth, drive diversification

Micro, small, and medium enterprises (MSMEs) can help boost Timor-Leste's growth and diversify its petroleum-dependent economy, experts said at a webinar on Dec 5.

However, entrepreneurship can only flourish in the island nation if there is infrastructure development, policy support, and credit access, according to the panelists in the webinar organized by the Asian Development Bank (ADB).

"Given that Timor-Leste was a small country with a 1.3 million population, promoting the internationalization of MSMEs is key to diversifying its economy," ADB senior economist Shigehiro Shinozaki said at the webinar.

He said increased private consumption, foreign tourists, and remittances contribute to Timor-Leste's growth, with the ADB expecting the country's GDP to expand by 3.1 percent in 2024 and 3.9 percent in 2025.

Shinozaki said MSMEs underpin the resilient growth despite global challenges, including increased geopolitical conflict and climate change.

He said that it is important for MSMEs to be part of the global supply chain, especially at a time when geopolitical conflicts are disrupting the global supply chain and raising shipping costs.

Shinozaki also presented the results of the business mapping survey conducted by the ADB and Timor-Leste's Ministry of Commerce and Industry in July.

This showed that most of the country's MSMEs are "sustainability-oriented", with annual revenues of no more than $5,000. Very few are involved in international trade, it also reported.

Shinozaki said "growth-oriented firms and innovative entrepreneurships" are yet to take root in the country.

This can only be done by implementing various policies and programs such as business clustering, assistance in business development, digitalization and marketing, upgrading workers' skills, and infrastructure development, he added.

Abrao Soares, soft loans and finance analyst at the United Nations Development Program, said access to finance is one of the main challenges for Timor-Leste's MSMEs.

"From the financial institution perspective, what they see is that MSMEs have limited financial capacity," Soares said.

He added that most banks are also wary of MSMEs because of their "limited financial knowledge", such as accounting, and their absence of credit history as they never had any access to formal banking systems and have no collateral to get a loan.

"Another challenge is the lack of framework for insolvency and dispute resolution. It's difficult for banks to give loans to the MSMEs because of the high risk of default," Soares said.

Timor-Leste is one of the world's youngest nations, only becoming a sovereign state in 2002.

A low-income economy located in Southeast Asia, Timor-Leste is dependent on oil, gas, and coffee exports. The country is applying to become a member of the Association of Southeast Asian Nations.

Bold Sandagdorj, an economist at the ADB's resident mission in Timor-Leste, said the country is facing the challenge of transforming its economy.

It needs to move from low growth — with an annual average GDP growth of 3 percent for the past 15 years — into a more diversified economy, "where the private sector should be the core engine of growth", he said.

"To achieve this transformation requires a very strategic policy shift," Sandagdorj said, noting that this includes leveraging the petroleum fund — the country's sovereign wealth fund — which is now 10 times higher than the non-petroleum GDP.

He said Timor-Leste needs to use development finance opportunities, strengthen institutional capacity, and integrate MSMEs into the supply chain.

"This integration can occur when some of the binding constraints are lifted," Sandagdorj said.

He added that the country needs to improve the legal environment and regulatory framework, increase investment in infrastructure and logistics, and create a more favorable environment for attracting private investments.