Due to political unrest, the information on these pages may not reflect current conditions in the country.

Country Risk Rating

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

Business Climate Rating

E
The highest possible risk in terms of business climate. Due to a lack of available financial information and an unpredictable legal system, doing business in this country is extremely difficult.

Strengths

  • Large, though largely untapped, gas reserves, which could increase in production in the coming years
  • Strategic position on the Bab el Mandeb Strait, at the threshold of the Red Sea

Weaknesses

  • Civil war, accompanied by an economic and humanitarian crisis, and division of the country
  • Extreme poverty: 80% of the population lives below the poverty line, making it the poorest country in the Arabian Peninsula and one of the poorest in the world
  • Famine due to shortages of basic necessities
  • Lack of infrastructure in the healthcare, education, and water sanitation sectors
  • Water resources in short supply
  • Net importer of energy
  • Poor business climate (bureaucracy, corruption, destroyed or non-existent infrastructure)

Current Trends

Houthis are on the verge of running the country

Already highly weakened by the civil war that has been raging for the past seven years and which has caused the deaths of 370,000 people (according to the UN), Yemen has been severely affected by the COVID-19 pandemic, leading the country into one of the most severe humanitarian crises in the world. The government is divided into two territories, each with its administration, making coherent overall management impossible. Since 2015, the north and the capital Sana’a have been controlled by Houthi rebels led by Mohammed al-Houti and his Revolutionary Council. In the south, with Aden, it is the loyalists, bringing together, since 2020, the government of President Hadi, internationally recognized, and the Southern Transitional Council (autonomist), led by Aidarous al-Zubaid, supported by Saudi Arabia. Despite several UN and U.S. attempts, a UN resolution imposing an arms embargo and targeted sanctions on the Houthis and calling on them to withdraw, the conflict has mainly remained unabated. After a brief truce following the outbreak of the COVID-19 pandemic, fighting resumed in the south, even intensifying in 2021. In November, pro-government troops withdrew from the strategic port of Hodeida, the main entry point for humanitarian aid and imports, on which the country depends for almost 90% of its food supplies, leaving the field open to the Houthis. This strategy came from a decision to refocus on the Marib region, considered until then as one of the last oases of stability in the country, to protect it from the arrival of the Houthis. This last government-controlled region in the north has significant oil resources that are a source of envy. Despite this, the Houthis have managed to encircle the city of the same name, displacing tens of thousands of civilians. In response to the drone attacks on Saudi sites, the Saudi-led military coalition of Gulf states carried out bombings. In 2022, the Houthis could emerge victorious from this battle, a turning point in the Yemen crisis, cutting into much of the government’s fiscal revenues. Moreover, this would have dramatic economic and social consequences if the country, where 2/3 of the population suffers from famine, was ruled by the Houthis, whose methods, including towards civilians, were not kind. Encouraged by the United States, Saudi Arabia, the prominent supporter of the Hadi government, is attempting to extricate itself from a conflict that has been bogged down for years and is proving costly to it (almost USD 100 billion spent). Its ally, the United Arab Emirates, has sharply reduced its military commitment.

 

A divided economy dependent on foreign aid

The Yemeni economy has been highly affected by the war and will only improve very slowly as long as that war continues. Firstly, private consumption, by far its main component, is constantly weakening because of shortages of essential goods and a sharp rise in inflation. It is primarily financed by expatriate remittances and international aid, which have suffered from COVID-19. However, as of September 2021, the United States, the European Union, and other countries have provided USD 600 million in support. International aid supports healthcare, food, drinking water, and education in a country with zero public investment. Inflation will remain high in 2022, particularly in the south, where monetary deficit financing and military setbacks are contributing to the collapse in the value of the local riyal. Supply problems will continue with the Houthi takeover of the port of Hodeida, pushing up prices for essential goods. By July 2021, the southern riyal had reached its lowest level since the start of the war (in 2015, there were 215 rials to the dollar, and in July 2021, there were 1400 rials to the dollar, compared to 600 for the Sana’a riyal). However, essential to the economy, the oil sector will lead the way out of the recession in 2022. Nevertheless, the depletion of oil fields, coupled with the need for more drilling to find new ones, is reducing oil and gas production. Finally, the agricultural sector (10% of GDP and 65% of jobs), which focuses on the cultivation of wheat, millet, khat, cotton, and coffee, suffers from a real problem in terms of infrastructure, notably irrigation, and water purification systems. 

 

Public and external deficits financed by international aid

The current account deficit should be reduced in 2022 by improving the trade deficit. Indeed, the country will benefit from continued high oil prices (70% of the country’s exports in 2019). Concomitantly, imports will continue to suffer from the currency's depreciation, weak consumption, and the seizure of several goods entry points by the Houthis. The sharp fall in remittances (10% of GDP), which constitute the primary source of foreign currency, weighed heavily on the balance of transfers and are expected to recover. With low foreign exchange reserves, financing will rely on international aid. Pledges in 2021 amounted to USD 1.7 billion, which will not be enough.

 

The public deficit will remain high if the government loses control of the Marib region and its oil resources (the primary source of revenue). Finally, the public debt, which benefited from the repayment facility implemented via the Paris Club debt service suspension initiative until 2021, will be gradually reduced.

 

Source:

Coface (02/2022)
Yemen