Capital Intelligence (CI) has raised Yemen's long-term foreign currency rating to B- from C and its short-term foreign currency rating to B from C. The rating agency also assigned long- and short-term local currency rating of B to the sovereign. The outlook is stable, reported a press release.
The upgrade reflects strong improvements in external solvency, international liquidity, and government debt ratios. Public external debt has fallen steadily since the mid-1990s, to an estimated 94 percent of current account receipts in 2003, thanks to substantial debt relief and oil-price induced increases in export earnings.
A concomitant strengthening of the balance of payments has resulted in the steady accumulation of official foreign exchange reserves from less than $1.5 billion in 1999 to about five billion dollars in 2003, and reserve coverage of both imports and external debt due within a year is now ample.
Reflecting the growth of official reserves, net public external debt has also declined impressively to an estimated nine percent of current account receipts in 2003. This ratio is one of the lowest of sub-investment grade sovereigns rated by CI.
Strong oil prices have also bolstered the fiscal position and together with external debt forgiveness contributed to a steady decline in the government net debt ratio from 119 percent of gross domestic product (GDP) in 1998 to an estimated 57 percent in 2003. Interest payments on government debt are manageable at around six percent of domestic revenue.
However, Yemen's credit ratings are constrained by significant structural weaknesses, the vulnerability of fiscal and external accounts to oil price changes, and the absence of a strong political and popular consensus for deeper reform.
GDP per capita is low at an estimated $557 in 2003. 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 labor force. Institutional weaknesses, infrastructure deficiencies, governance problems, and an ineffective banking system hamper private sector activity and investment and constrain economic growth.
Receipts from oil and gas account for 70 percent of domestic budget revenue and 85 percent of merchandise export earnings. Consequently, government cashflow and external accounts are vulnerable to movements in the international price of oil. More importantly, output from Yemen's main oilfields is declining and the rate of depletion is projected to accelerate beyond 2006. Without significant new discoveries and production, substantial, and politically challenging, fiscal consolidation will be required to prevent a rapid deterioration in public debt dynamics.
The government remains committed to structural reform under a policy framework prepared in cooperation with the World Bank and International Monetary Fund (IMF), but local opposition to many proposed measures has meant that the pace of reform has slipped. Yemen's ratings trajectory will, however, depend to a large extent on the government's ability to build a popular consensus for the lengthy reform effort that is needed to raise the level of economic development. — (menareport.com)
© 2004 Mena Report (www.menareport.com)
