(EIU Viewswire Via Thomson Dialog NewsEdge) COUNTRY VIEW

FROM THE ECONOMIST INTELLIGENCE UNIT

OVERVIEW: The Economist Intelligence Unit expects the Government of National Unity (GNU) to survive over the outlook period, although concerns persist over the implementation of the 2005 north-south peace deal. There is a climate of mistrust, particularly over the sharing of oil revenue and boundary delineations. The situation in Darfur has drawn increasing international attention, owing to ongoing inter-factional fighting and the government's launch of a new offensive against the rebels. The government may come to a preliminary agreement allowing increased UN participation in and funding of the existing African Union peacekeeping force in Darfur, but important differences remain over the appropriate command structure. In conjunction with renewed government negotiations with Darfuri rebels, this force may begin to stabilise the situation in the region, but the downside risks are high. Despite the signing of a peace agreement with eastern rebels in October 2006, there also remains a danger of ongoing unrest in other outlying areas. Real GDP growth will remain robust, driven by high oil production and rising domestic demand. Sudan's external and fiscal accounts will both record substantial deficits over the outlook period, however, as imports and government expenditure grow strongly.

Domestic politics: We still expect the Comprehensive Peace Agreement (CPA) signed in 2005 between the ruling National Congress (NC) party in the north and the southern Sudan People's Liberation Movement (SPLM) to hold--despite rising tensions towards the end of the outlook period, as parties prepare for the elections that are due to be held before mid-2009. There will be ongoing differences between the NC-dominated central government in the capital, Khartoum, and the SPLM-led autonomous Government of Southern Sudan over various important issues, especially the equitable division of oil revenue and the exact delineation of the north-south boundary. Nevertheless, gradual progress will continue to be made in implementing the country's new interim constitution, and the GNU will remain in place.

International relations: The Darfur conflict will continue to have a negative impact on Sudan's external relations, especially if the government fails to reach an agreement with the UN over detailed plans for a joint UN-African Union peacekeeping force. Nevertheless, international disapproval is unlikely to jeopardise Sudan's economic development, with partners such as China, Malaysia and India unwilling to risk the enormous sums they have invested in the country's energy sector.

Policy trends: Under the terms of its IMF reform programme, the Sudanese government is committed to pursuing economic stability, including low inflation and a strong external position. However, the government appears to have temporarily abandoned these goals because of the pressing need to ensure that the country experiences a "peace dividend" in the wake of the three recent peace agreements. There is evidence that the government's focus on the daunting task of countrywide reintegration, regeneration and reconstruction following decades of conflict has had a negative impact on the fiscal and current-account balances, and has forced the government to take on extra non-concessional debt, despite substantial existing arrears and IMF disapproval. This trend is expected to continue over the outlook period.

International assumptions: The global economy will have registered healthy overall growth in 2006, of around 5.3% at purchasing power parity rates. However, slower US and EU expansion in 2007-08 is forecast to cause an easing of global growth to an average of 4.7%. Strong demand, especially in Asia, has pushed crude oil prices up to record highs in recent years. Although prices have fallen back in recent months, political uncertainties in several large oil producers (particularly in the Middle East) will continue to weigh heavily on the oil markets, with OPEC countries also committing themselves to keep prices relatively high. We therefore expect the average price of the benchmark dated Brent Blend to average around US$65/barrel in 2006-07, before easing to about US$63/b in 2008, on the back of additional projected supply growth.

Economic growth: Rising oil earnings should allow the Sudanese government to boost investment expenditure on infrastructure over the outlook period, in line with its commitments to promote regional economic development under the CPA and other agreements. This, in turn, will benefit private consumption, which is also likely to be supported by growing confidence based on political stability in the south. Surging import demand will partly offset the growth in export volumes caused by the coming on stream of new oil capacity. Since these imports will largely go into development projects, they should ultimately benefit the economy, but their effect over the outlook period will be to constrain growth. As a result, we estimate that real GDP growth will have accelerated to 8.7% in 2006, and project a further rise in 2007, to about 11.8%. The slower rate of increase in Sudan's oil output in 2008, however, will bring real GDP growth back down to around 5.5%.

Inflation: Inflation fell sharply in the first half of 2006, averaging around 4% year on year (compared with an average of 8.2% in the first six months of 2005). The slowdown probably reflects measures by the Bank of Sudan (the central bank) to tighten domestic liquidity and the authorities' easing of supply bottlenecks at the country's ports, as well as the role that the rapid strengthening of the dinar played in containing the cost of imports. However, consumer price inflation is likely to be boosted in the later part of the year by the cuts in subsidies on fuel and sugar imposed in August. As a result, we estimate that inflation will have reached the IMF-agreed target of 7.5% in 2006. Over the outlook period, robust domestic demand is expected to keep price pressures strong, causing inflation to average just over 8% in 2007-08.

Exchange rates: The central bank operates a managed float of the Sudanese dinar against the US dollar, through purchases of foreign currency and daily limits on the trading band. Some liberalisation of the exchange-rate regime has allowed the currency to appreciate rapidly since 2005 as a result of the large sums of foreign currency entering Sudan in the form of oil earnings, rising foreign investment and remittances. By mid-November 2006 the dinar had strengthened to about SD204:US$1--a year-on-year rise of around 12%. If this trend continues, however, the competitiveness of the country's non-oil exports will suffer. We therefore expect the central bank to begin to restrain the rate of dinar appreciation within the outlook period. From an estimated strengthening of 13% in 2006, the currency is projected to appreciate by around 5% on average in 2007-08.

External sector: Largely because of record international oil prices, we estimate that total export revenue will have risen to US$6.6bn in 2006. The effect of continued high oil prices will be compounded in 2007-08 by strong production increases, boosting export revenue to around US$10.5bn in 2007 and US$11.6bn in 2008. Import spending (particularly on capital inputs) will also rise sharply, from an estimated US$8.7bn in 2006 to around US$10.9bn in 2007 and US$12.5bn in 2008. We estimate that the trade deficit will have widened to around US$2bn in 2006, owing to a sharp increase in imports and further delays to anticipated oil production increases. It will fall back to an average of around US$630m in 2007-08, however, as new oilfields finally come on stream.

SOURCE: Country outlook

Copyright 2006 Economist Intelligence Unit

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