Yemen: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Return to more moderate growth
The production start-up of new natural gas liquefaction facilities (LNG) spurred GDP growth in 2010. This acceleration will give way to more moderate growth in 2011, the result of a further decline in oil production - attributable to the depletion of reserves - and the negative effect on household consumption of the political instability and the reduction in subsidies. Domestic demand will also be affected by the persistent drought that has hobbled agriculture, Yemen's primary economic sector. Investment, meanwhile, will remain constrained by growing insecurity. And Aden port activity could suffer from the high risks of piracy in the Gulf of Aden.
Inflation will moreover remain above 10% due to the discontinuation of subsidies, the volatility of world raw material prices, and a possible depreciation of the Yemeni riyal.
Persistence of large twin deficits
Hydrocarbons constitute the main source of fiscal revenues (60%) and export sales (90%).
The primary fiscal measures taken in the past year include the imposition of a general sales tax, in effect since July 2010, and the gradual reduction of fuel subsidies. Largely financed in 2009 by the Central Bank and thus monetised, the fiscal deficit in 2011 is expected to be financed mainly by borrowing in the domestic market and relying on financial backers to cover any remainder.
In this regard, of the three-year $5-billion aid package promised at the London donors conference in 2006, just $400 million were actually effectively paid out by end 2010: Aid is effectively difficult to implement due to inefficient Yemeni administration and corruption. Late July 2010, the IMF approved a three-year $370-million Extended Credit Facility Arrangement in support of a programme whose purpose is to develop stronger growth and reduce poverty.
In foreign trade, the growth of LNG exports will be likely to partially offset the decline in oil production, while the import bill is expected to grow only moderately with purchases of refined oil deterred by the reduction in fuel subsidies. Although the trade deficit is nonetheless expected to widen slightly, the current account deficit could ultimately shrink but without, however, preventing erosion of foreign exchange reserves.
Growing insecurity and political instability
The poorest country on the Arabian peninsula, Yemen is confronted with serious socio-economic, political, and security difficulties. The contagion effect of regional movements of popular insurrection may further destabilize the country, already facing a risk of disintegration.In northern Yemen, despite a ceasefire with the rebellion of the Shiite Zaydite tribes, the situation remains extremely tense. In the South, in the former Peoples Democratic Republic before the reunification in 1990, the authorities have to contend with a resurgence of secessionist sentiment. And these difficulties are compounded by the activism of Al Qaida in the Arabian Peninsula, which has regrouped its Saudi and Yemeni forces, to capitalise on the extreme poverty and the anti-American sentiment among the people.
In this context, President Ali Abdullah Saleh seems to be in a weak position. The legislative elections, initially scheduled in April 2009, were postponed and could be held in 2011 whereas the president's mandate will normally end in 2013.
This climate can only hinder implementation of economic reforms and improvement in a business environment hardly conducive to investment.
Strengths
- Political and financial support of the international community
- Moderate foreign debt
- Remittances from expatriate workers, a major source of foreign currency earnings
Weaknesses
- Depletion of oil reserves (with Yemen apt to become an oil importer from 2016) not offset by the production of liquefied natural gas
- Water shortage prejudicial to agriculture
- Political instability and pervasive insecurity compounded by severe poverty that affects 42% of the population
- Unfavorable business environment (insecurity, bureaucracy, deficient infrastructure)