Country Report Yemen March 2009

Outlook for 2009-10

• Political cohesion in 2009-10 could be undermined by the deteriorating public finances, rising al-Qaida activity and potential outbreaks of tribal and separatist violence in both the north and the south of the country.
• 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 12% of GDP in 2009-10, although this is lower than our previous forecast, as newly released data have indicated lower than envisaged spending in 2008.
• 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 5.2% in 2009-10, as Yemen's first LNG plant comes on stream.
• Average inflation in 2009 is expected to decline rapidly, to 5.6%, owing to the forecast sharp drop in global commodity prices.
• The current-account deficit is expected to average 13.4% of GDP in 2009-10, although Yemen's foreign reserves, equivalent to an estimated 8 months of import cover, should be sufficient to meet its financing obligations.

Monthly review

• The parliamentary election has been postponed for two years, after a joint request from the ruling party and opposition. Negotiations on the way forward could now encompass a wholesale revamp of the political system.
• The president, Ali Abdullah Saleh, and the head of al-Qaida in the Arabian Peninsula, Nasser al-Wahaishi, have made competing appeals for support to tribal leaders.
• Mr Saleh has announced that the government is looking to buy US$1bn in military equipment from Russia, although the move may be an attempt to encourage a renegotiation of Yemen's external debt obligations to Russia.
• Preliminary data indicate that the fiscal deficit narrowed slightly in 2008, as oil revenue surged on the back of higher oil prices, and both current and, in particular, development expenditure were down against budget.
• According to official data, average inflation surged to 19% in 2008, on the back of higher rental, gas and food prices. However, the sharp drop in global commodity prices from October brought down year-end inflation to under 11%.
• Yemen's first major zinc export project has been inaugurated, which it is expected could contribute up to US$600m to the economy.

Source: Country Report