Houthi rebels signed a UN-brokered peace agreement on 20 September, after having advanced to the capital Sanaa, taking control of major state institutions, including military sites, the central bank and the parliamentary building. The Houthis are a Zaidi-Shia grouping whose traditional power base lies in the north of the country. Initially, their protests and advancements towards the capital were triggered by the lifting of fuel subsidies by the Yemeni government on 30 July. The reduction of untargeted subsidies was part of a USD 550 million ECF arrangement with the IMF, which was signed in early September. Under the peace agreement, a new national government will be formed, fuel subsidies will be partially restored and presidential advisors from the Houthi and the Southern Movement will be appointed.

Impact on country risk

Despite the peace agreement, the Houthis’ intentions to withdraw militarily from Sanaa in the coming weeks remain uncertain. Meanwhile, (Sunni) Al Qaeda in the Arabian Peninsula (AQAP) – which has a strong presence in Yemen – shows strong hostility towards the (Zaidi-Shia) Houthis. Therefore, currently the most intense risk is that of an escalation of violence in Sanaa, which could turn Yemen into a civil war. But even if an escalation of violence can be avoided and a new government can be formed, important questions remain on how this government will function and whether the country will continue to receive the multi- and bilateral financial support on which it is currently dependent. It is very doubtful that the government will be able to meet the performance criteria under the IMF programme, which would threaten disbursements under the programme. Indeed, the reduction of fuel subsidies, which triggered the Houthis’ advancements, was one of the benchmarks under the IMF programme, as they represented 7% of GDP and 30% of total public expenditure last year. Moreover, more support from Saudi Arabia – which has traditionally been a crucial donor – is uncertain because of Saudi suspicion that the Houthi movement is supported by (Shia) Iran, its main rival in the region, a claim that both parties deny, however.

Analyst: The Risk Management Team, s.vanderlinden@credendogroup.com