The outlook remains stable.
Yemen’s ratings are supported by favourable external indicators, a moderate government debt stock, and a renewed focus on governance and economic reform. But sovereign creditworthiness is constrained by an overdependence on oil, fragile debt dynamics, a weak economic base, and political and policy risks.
Successive balance of payments surpluses, underpinned by high oil prices, have enabled the authorities to build a comfortable level of foreign exchange reserves relative to external financing needs. Yemen became a small net external creditor for the first time in 2005, and official reserves are projected by CI to reach USD6.9 billion by end-2006 compared to a public external debt stock of about USD5.5 billion. Official reserves amply cover short-term external debt and, combined with a reasonably flexible exchange rate regime, should enable the economy to absorb external shocks in the near term.
The GDP share of government debt has been declining for most of the past decade and is projected by CI to fall to 43% at end-2006, or to 34% net of government deposits with the banking system. Interest payments on government debt are manageable at around 6%-7% of domestic revenue. Debt ratios are expected to gradually increase over the medium term as oil production declines, but should remain at reasonable levels at least until the end of the current decade.
Notwithstanding these developments, the underlying structure of the economy and public finances remains comparatively weak.
GDP per capita is low at an estimated USD864 in 2006. The population is rising at a relatively fast rate but the economy is not growing quickly enough at present to deliver sustained reductions in poverty or to absorb an expanding labour force. Institutional weaknesses, infrastructure deficiencies, governance problems, and an ineffective banking system hamper private sector activity and investment and ultimately constrain economic growth.
Receipts from oil and gas account for around 75% of domestic budget revenue and over 85% of merchandise export earnings. This dependence is particularly worrying as output from the country’s main oilfields is declining and Yemen could face serious public and external debt problems within 10 years unless significant discoveries are made or the government successfully transforms the structure of the economy and public finances.
In this context, CI is encouraged by the recent adoption of a national reform agenda aimed at strengthening the rule of law, improving public financial management, and combating corruption. The upfront focus on strengthening the institutional and policy environment raises hopes that the latest five-year economic and social development plan, covering the period 2006-2010, will be implemented in a more consistent manner than its predecessors.
The incentive to reform has also increased following the decision of the Gulf Cooperation Council (GCC) to support Yemen’s economic and financial integration with the bloc, with a view to full accession once an acceptable level of convergence has been reached.
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