Country Report Yemen June 2009

Outlook for 2009-10

• There is an increasing risk of major confrontation between the government and southern separatists. Rising al-Qaida activity and 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.
• We expect Yemen to return wide fiscal deficits, equivalent to an average of 13% of GDP in 2009-10, as oil revenue falls markedly from 2008 levels, and the government struggles to rein in expenditure.
• 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 4.3%, owing to the forecast sharp drop in global commodity prices.
• The current-account deficit is expected to average 11% of GDP in 2009-10, although Yemen's foreign reserves, equivalent to approximately eight months of import cover, should be sufficient to meet its financing obligations.

Monthly review

• The government has increased its suppression of dissent by preventing the publication of newspapers; carrying out an assault on newspaper offices; and paving the way for the prosecution of separatist politicians.
• Protests in Aden ended in violence after police opened fire on a group of demonstrators, killing three people and injuring 30. The protests took place on Union Day amidst increasing calls for southern independence.
• The government's fiscal position has come under pressure amid collapsing oil revenue.
• Reports of high unemployment have prompted Gulf states to take action by offering Yemeni workers preferential treatment in GCC job markets.
• The current-account deficit narrowed in 2008, primarily as a result of high oil revenues, which helped offset higher deficits in the income and services accounts.
• Consumer price inflation was considerably lower in the year to March 2009. This correlated with declining global commodity and import prices over the last year, and a continuation of this downward trend is expected.

Source: Country Report