Country Report Yemen September 2009

Outlook for 2009-10

• There is a growing risk of the disintegration of the Yemeni state, 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 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.
• Lower oil prices and falling oil production over the forecast period will lead to a decline in fiscal revenue, causing the budget deficit to widen to an annual average of 10% of GDP in 2009-10.
• The economy will struggle over the outlook period, as it is buffeted by falling oil output and worsening political instability. However, the start of gas exports will allow real GDP growth to rise to 3.8% in 2009 and 5% in 2010.
• We expect the riyal to depreciate more rapidly over the outlook 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 deficit is set to widen markedly in 2009, to US$2.6bn, as oil prices and production dip, although it will narrow slightly in 2010, to US$2.5bn, as liquefied natural gas (LNG) export volumes increase.

Monthly review

• War has once more broken out between the security forces and Houthi rebels. The government has blamed the insurgents for the resumption of violence, saying it was forced to act after numerous ceasefire violations.
• The president has received Mohammed Ali Hasan al-Moayyad, a well-known Yemeni sheikh who, prior to his release in August, was imprisoned for four years in the US for conspiring to provide assistance to al-Qaida.
• Yemen has reportedly sought US$2bn in urgent economic assistance from Saudi Arabia, after the government's share of Yemeni oil revenue in the first half of 2009 fell to just one-quarter of the level in the year-earlier period.
• In an effort to revive the stalled economic reform programme, the president has approved a ten-point plan designed to provide the population (and donors) with a series of realistic short- to medium-term targets.
• Having been virtually pegged to the US dollar since the start of 2008, the riyal has weakened noticeably since June.
• Consumer price growth ticked up in June, to 4%. However, the rise in inflation was largely owing to a sharp increase in the volatile price of qat, and domestic liquidity has thus far remained depressed.