Country Report Yemen July 2009

Summary

There is an increasing risk of major confrontation between the government and southern separatists. Al-Qaida activity and the potential resurgence of fighting in the north add to the poor outlook for political cohesion in 2009-10.
The opposition coalition, the Joint Meeting Parties, and the ruling General People's Congress have agreed to postpone the legislative election for two years, but the delay is unlikely to lessen tensions over political reform.
Economic reform is likely to be stymied by serious security concerns, slowing efforts to diversify the economy away from hydrocarbons exports.
We have lowered our forecast for Yemen's fiscal deficit in 2009-10, after revising upwards our oil price projections. However, with fuel subsidy outlays also set to increase, we still expect the deficit to average 11.7% of GDP.
Yemen's economic growth is likely to be held back by falling oil prices and weak government consumption. However, average real GDP growth should still rise to 5.1% in 2009-10, as Yemen's first LNG plant comes on stream.
Average inflation in 2009 is expected to decline rapidly, to 4.2%, owing to the forecast sharp drop in global commodity prices and a positive base effect. However, it is likely to return to a trend rate of around 12% in 2010.
We have narrowed slightly our projections for Yemen's current-account deficit, in line with the upward revision to our oil price forecast. We now expect the current account to return an average deficit of US$2.4bn in 2009-10.

A number of foreign aid workers in Saada province have been killed. Although the government has sought to blame local Zaydi Shia rebels, the attack is most probably the work of al-Qaida.
In developments unrelated to the abductions, clashes between the Zaydi Shia rebels and government forces picked up during May and into June, and both protesters and security forces have died in clashes in the south.
Yemen is suffering a severe drought, and an influential former prime minister has warned of famine. However, given its dependence on food imports, falling foreign-exchange reserves arguably pose a more serious threat.
Throughput at the Aden Container Terminal has dropped markedly, reflecting not only declining global trade volumes, but also the impact of piracy on insurance premiums for ships travelling through the Port of Aden.
Yemen's foreign-currency reserves have fallen steeply since late 2008, as a result of tumbling oil prices. Having peaked at US$8.8bn in October, the Central Bank of Yemen reports that they slipped to US$7.3bn in April.

Source: Country Report