Country Report Yemen October 2009

Outlook for 2010-11

• There is a growing risk that the Yemeni state will disintegrate, as the government struggles to cope with the myriad threats posed by Zaydi rebels in the north, growing southern secessionist sentiment and al-Qaida activity.
• The poor security situation will limit the extent of Western commercial and diplomatic links, but, conversely, Yemen's ties with its Gulf neighbours may continue to strengthen, given overlapping security interests.
• Yemen is set to return wide fiscal deficits over the forecast period, averaging 10.5% of GDP, as oil receipts stagnate and efforts to stimulate non-hydrocarbons revenue are undermined by the fragile political scene.
• The economy will struggle in 2010-11, as it is buffeted by falling oil output and growing political instability. However, surging gas exports will allow real GDP growth to rise to 5% in 2010, before falling back to 2.6% in 2011.
• We expect the depreciation of the riyal to accelerate over the forecast period, and there is a risk that the combination of declining oil revenue and dwindling foreign reserves will cause the currency to fall even more steeply.
• Yemen's current account is set to return historically large deficits over the forecast period. Although the deficit will narrow slightly in 2010, as gas exports and oil prices rise, it will widen to a record US$3.1bn in 2011.

Monthly review

• Despite several offers of mediation from abroad, and two locally led attempts to impose a ceasefire, fierce clashes in the Saada region of Yemen between Zaydi insurgents and government forces have continued.
• Civilians have increasingly found themselves caught in the crossfire, as the fighting in Saada has raged. In one instance 87 people, who were apparently sheltering in a school, were killed in an air strike.
• The fighting in Saada is increasingly drawing the attention of outside powers, with Yemen accusing, among others, Iran, Bahraini Shia groups and a radical Iraqi Shia cleric, Moqtada al-Sadr, of supporting the rebels.
• Two UAE companies, Danagas and Crescent Petroleum, have announced plans to build a "gas city" in Yemen. The news comes on the back of a gas find in Block 18.
• Oil output has continued to fall, reaching just 260,000 barrels/day (b/d) in August, down from an average of 310,000 b/d in 2008.
• Yemen's foreign reserves have continued to decline, with the Central Bank of Yemen reporting that the stock of reserves was down to US$6.8bn in July, compared with over US$8.8bn as recently as last October.

This report covers the following industry codes:
SIC Code: 10
NAICS Code: 212