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COUNTRY RISK 2008: Yemen
By John | July 24, 2008
Yemen, one of the poorest countries in the Arab world, reported average annual growth in the range of 3-4% from 2000 through 2007. Its economic fortunes depend mostly on declining oil resources, but the country is trying to diversify its earnings. However, the country poses significant risk for businesses and could present adverse macro level problems should governance deteriorate.
In 2006 Yemen began an economic reform program designed to bolster non-oil sectors of the economy and foreign investment. As a result of the program, international donors pledged about $5 billion for development projects. In addition, Yemen has made some progress on reforms over the last year that will likely encourage foreign investment. Oil revenues probably increased in 2007 as a result of higher prices.
North Yemen became independent of the Ottoman Empire in 1918. The British, who had set up a protectorate area around the southern port of Aden in the 19th century, withdrew in 1967 from what became South Yemen. Three years later, the southern government adopted a Marxist orientation. The massive exodus of hundreds of thousands of Yemenis from the south to the north contributed to two decades of hostility between the states. The two countries were formally unified as the Republic of Yemen in 1990. A southern secessionist movement in 1994 was quickly subdued. In 2000, Saudi Arabia and Yemen agreed to a delimitation of their border. Located in the Middle East, it borders the Arabian Sea, Gulf of Aden, and Red Sea, between Oman and Saudi Arabia
Looking at the WBI Governance Indicators for the country, it trails the regional averages for all countries in North Africa and the Middle East. The most significant disparity is in its political stability.
As the Energy Information Administration notes in this regard:
Though the government of Yemen is fairly stable following the re-election of President Ali Abdullah Saleh in 2006, security remains a concern of foreign firms doing business in Yemen. Since the attacks on the USS Cole in 2000, several other foreign interests, specifically oil interests, have been attacked-these include the bombing of the Limburg oil tanker off the coast of Yemen, causing a massive fire and the leakage of 150,000 barrels of oil into the Gulf of Aden; an unsuccessful firing of a surface-to-air missile at an oil company helicopter in 2002; the 2006 foiled suicide bomb attempt against two oil facilities just prior to the elections; and the more recent attacks on oil company personnel near the border between Marib and Shabwa governorates. In addition, there have been reports of violence in rural areas, attacks on oil company personnel and kidnappings.
Political stability in Yemen is vitally important to regional oil producers, given that Yemen sits at the entrance to the Bab el Mandab strait, which links the Red Sea to the Indian Ocean. The strait is one of the most strategic shipping lanes in the world, with an estimated 3 million barrels per day (bbl/d) oil flow (please see our World Oil Transit Chokepoints report for more information). Disruption to shipping in the Bab el-Mandab could prevent tankers in the Persian Gulf and the Gulf of Aden from reaching the Suez Canal/Sumed pipeline complex, instead diverting them at great cost around the southern tip of Africa.
“In spite of reforms, the government continues to fight the perception of weakness. The civil service is overstaffed and underpaid. Private foreign investment, apart from the petroleum sector, has been negligible, largely because of governance issues. The situation is complicated further by the political and military strength of the tribes, which are not always on good terms with the central government,” notes the World Bank Group. The WBG further notes that “[t]he sustainability of development efforts depends on the willingness of those in Yemen, from the national government to local communities, to maintain the investments and operate the systems put in place. So far, the record is not good, largely because of the low level of governance.”
The country’s major trading partners include China 31.5%, India 17.5%, Thailand 16.7%, South Korea 7%, US 6.8% and the UAE 4.1% with oil being the primary export to these countries. Investors should pay particular attention to businesses operation in Yemen, particularly those companies in the extractive industries engaged in transactions with the Yemeni government.
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