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Saturday, 03 September, Year 3 d.Tr. | Author: Mircea Popescu

29328 3/22/2005 15:25 05BUCHAREST721 Embassy Bucharest UNCLASSIFIED This record is a partial extract of the original cable. The full text of the original cable is not available. UNCLAS SECTION 01 OF 04 BUCHAREST 000721

SIPDIS

STATE FOR EUR/NCE - WSILKWORTH, EB/IFD STATE PASS USTR USTR FOR LERRION TREASURY FOR STUART USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL STATE PASS USAID

E.O. 12958: N/A TAGS: ECON, ETRD, EIND, EFIN, RO SUBJECT: ROMANIAN ECONOMY APPEARS ON GOOD TRAJECTORY

1. Summary: Romania made impressive economic progress in 2004, demonstrating strong GDP growth, curbing inflation and lowering unemployment. On the negative side, strong consumer demand fueled a growing current account deficit as Romania's trade deficit rose due to surging imports. The country appears to have put itself firmly in a growth mode, but it must watch carefully its current account deficit. A strengthening currency will help in meeting inflation targets. End Summary.

A Good Year
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2. Romania posted a post-communist record 8.3 percent economic growth in 2004 with total GDP of $73.2 billion, in excess of $70 billion for the first time. An excellent agricultural harvest and a construction boom were the main engines of this growth. Industrial output increased largely due to expansion in the processing sectors. Inflation dropped from 14.1 percent in 2003 to 9.3 percent last year - the first single-digit annual inflation rate posted since 1989. Official foreign exchange (forex) reserves reached record highs at the end of 2004, representing 5.2 import months, up from 4.1 months at the end of 2003. (See paragraph 17 for statistical scorecard).

Consumer Demand Assists GDP Growth
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3. Growth in the agricultural sector, up 22.2 percent, and construction, up 9.0 percent, were the largest contributors to strong GDP in 2004. Industrial output increased 5.3 percent; industries showing significant growth included manufacturing, wood processing, chemicals, transportation, electric equipment, and construction materials. Lower outputs were posted in the medical, precision and optical equipment, as well as food and beverage industries. The mining output rose 2.4 percent, while energy output dropped 3.2 percent against 2003. Extremely favorable crop conditions resulted in the 22 percent growth in the agricultural sector. However, in the absence of a viable irrigation system, this stellar agricultural performance is not sustainable for the long term.

4. Final consumption rose 10.3 percent and investments grew faster than the overall GDP. However, investment as a share of GDP still is low at 25 percent.

Record Trade Deficits
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5. Romanian exports posted record levels, up 33.8 percent in USD and 21.3 percent in Euro, in comparison with 2003. For the first time Romanian exports exceeded $20 billion. This export performance is all the more striking, given that the Romanian Leu (ROL) appreciated both against the USD - by 10.8 percent, and the Euro - by 3.5 percent. This appreciation hindered Romanian exports while assisting importers. Italy, Germany, France, Turkey and the U.K. have remained the primary markets for Romanian exports. Romanian exports to the EU rose 7.2 percent last year. The EU's enlarged market accounted for 72.9 percent of Romanian total exports, up from the 67.7 percent in 2003. Romanian exports to the U.S. reached $668.5 million, up 7.3 percent, and comprised 2.8 percent of total Romanian exports, in comparison with 3.5 percent in 2003.

6. Textiles and apparel topped the list of Romanian exports, at 22.3 percent, increasing 17 percent to $5.2 billion. However, textile exports are on a clear downward trend. Their weight has decreased from one third of total exports in 2002 to 25.4 percent in 2003, as local wages have moved upward, resulting in less attractive finished product costs. Machinery and equipment, 17.6 percent of total exports, soared 45.6 percent, and metal products, 15.4 percent of total exports, increased an impressive 62.9 percent. Romanian exporters fear that 2005 may witness a halt of export growth, due to ROL appreciation and the redirection of company resources as production facilities are upgraded to bring goods up to EU standards.

7. While Romanian exports exceeded $20 billion in 2004, Romanian imports broke the $30 billion record. Imports were driven mainly by a relative absence of domestic supply that, along with more favorable financing terms, boosted non- government credit by 38 percent. Machinery and equipment topped Romanian imports with a 23.8 percent share of imports, representing a 35.0 percent increase over 2003. This trend was fueled by the Romanian corporate sector's appetite for modern technologies and pent-up durable goods demand. Textiles, minerals, transportation and chemicals were also top imports. Due to attractive prices and an increasingly wide range of choices, motor-vehicle imports saw the most spectacular increase - 103.2 percent compared with 2003. Romanian imports continued to arrive primarily from Italy, Germany, France and Russia. The percentage of suppliers from the now enlarged European Union was 64.9, compared with 57.7 percent in 2003. Significantly, U.S. exports to Romania surged to $933 million, up 67.1 percent from 2003. These U.S. goods comprised 2.9 percent of total Romanian imports, up from 2.3 percent at the end of 2003.

8. The 2004 current account deficit of $5.458 billion rose 57.8 percent in USD, or 43.8 percent in Euros, against 2003. This was largely driven by the strong increase in the goods and services deficit, up 56 percent in USD terms, and, income deficit, up 25.2 percent in USD. The increase in the current transfers surplus, up 35.1 percent, could not offset the deficit surge. Aside from the goods trade deficit, the main drivers of the worsening current account deficit were a 23.6 percent drop in the international transportation surplus and 13.8 percent deterioration of the international tourism deficit. The International Monetary Fund (IMF) views the current account deficit of nearly 7.5 percent of GDP as a matter of concern. The increasing 2004 foreign direct investment comprised approximately 39.5 percent of the current account deficit. This amount, however, is relatively small when compared to current transfers that covered about 56.7 percent of the current account deficit.

Single-Digit Inflation at Last: Can it last?
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9. For the first time in 15 years, Romania succeeded in posting annual inflation below ten percent, to 9.3. The GOR's nine percent target rate was only slightly exceeded by 0.3 percent. Price increases in non-food goods drove inflation. The 2003 monthly average retail inflation rate was 0.7 percent, compared to 1.1 percent in 2003. The ROL's appreciation, a good agricultural year, and the former GOR's reluctance to adjust public utility prices on the eve of general elections offset increasing international crude prices.

10. The official unemployment rate dropped to 6.2 percent in December 2004, down from 7.4 percent a year earlier. This was primarily due to expansion in the manufacturing, construction, agriculture, and retail industries. Also, continuing significant labor migration abroad represented another major factor in maintaining the lower local unemployment rate.

Tight Budget Execution
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11. Improved revenue collection and tighter controls on spending caused Romania's consolidated budget deficit to fall to $834.5 million, representing 1.2 percent of GDP, lower than both the 2003 2.4 percent deficit and the 1.64 percent annual target. Consolidated budget revenues amounted to $21.7 billion, up 25.4 percent when compared with 2003, whereas consolidated budget expenditures amounted to $22.5 million, up 22.3 percent from last year. Local governments' 2004 surpluses amounted to a total of $117.9 million, against a 2003 deficit in the amount of $4.3 million. However, the 2004 social assistance budget deteriorated to a $4.2 million deficit, from a previous 2003 surplus of $53.3 million. Increasing revenues due to economic growth, higher sales and excise collections, more focus on tax collection, and tighter spending monitoring under the IMF's microscope resulted in a lower 2004 consolidated budget deficit.

Foreign Investments Inching Up
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12. The net stock of foreign direct investment (FDI) between 1990 and 2004 amounted to slightly over $13.57 billion, up 30.9 percent from 2003. Leading country investors were the Netherlands (with 15.5 percent of the total investment since 1990), Austria (12.2 percent), France (11.1 percent), Germany (8.0 percent), the U.S. (6.5 percent), and Italy (5.2 percent). Nonetheless, Romania's foreign direct investment per capita of merely $148.5 demonstrates that Romania has not yet become a favored destination for foreign investors. U.S. investment in 2004 rose 26.1 percent to $888.4 million, although the percentage weight shrank from 6.8 to 6.5 and the U.S.'s rank fell from fourth to fifth place, due to Austrian petroleum company OMV's purchase of the national oil company Petrom.

13. At the end of December 2004, total foreign portfolio inflows jumped 47.0 percent reaching $249.5 million; outflows rose 65.5 percent to $165.5 million. During 2004, total purchases performed by foreign investors on the Romanian capital markets soared 68.8 percent to $321.1 million, while their total local sales jumped 71.5 percent to $209.8 million. The trend was positive, encouraged by the increasing potential of this emerging capital market.

Privatization Continues
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14. In 2004, the State Asset Resolution Authority (AVAS) sold 62 medium and large companies in which the state was a majority shareholder. In addition to these transactions, AVAS privatized minority stakes in 85 companies, resulting of total revenues to AVAS in the amount of $381.2 million. The largest single privatization that occurred in Romania last year was the Ministry of Economy and Trade's sale of the national oil company, PETROM, to Austria's OMV, for about 680 million euros. Approximately another 830 million euros was pledged for capital investment.

A Capital Market Ready to Take Off?
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15. Throughout 2004, Romania's capital markets displayed increasing dynamism. The number of shares traded increased 2.85 times and overall market capitalization doubled in USD terms reaching $12.9 billion by the year's end. Average daily turnover jumped to $3.7 million, a substantial increase from 2003's $1.2 million. Declining interest rates increased investor appetite for stock market plays, while the number of listed securities continued to grow and diversify. Banking and oil stocks saw the highest trading volumes. Bucharest's two stock exchanges are scheduled to merge in 2005, subsequent to the Bucharest Stock Exchange's expected incorporation. Trading volume is likely to steadily increase in 2005 as initial public offerings of stock and bonds in a wide range of industries are expected to occur, including public utilities.

Comment
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16. Slashing inflation was the GOR's greatest macroeconomic achievement in 2004; whether this downward trend will continue in the face of increasing pressures remains to be seen. The IMF's recommended public utility tariff increases will, however, add to the price level. Working in favor of contained or even lower inflation will be the Central Bank's policy of allowing the forex market to adjust the price of the ROL upward against the dollar and Euro.

17. ROMANIA'S MACROECONOMIC SCORECARD
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INDICATOR 2003 2004 PERCENT CHANGE
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INDUSTRIAL OUTPUT VOLUME GROWTH RATE AGAINST SAME PERIOD, YEAR-EARLIER 3.4 5.3

UNEMPLOYMENT RATE END OF PERIOD (PCT) 7.4 6.2

INFLATION RATE (PCT) CUMULATED FROM THE BEGINNING OF THE RESPECTIVE YEAR 14.1 9.3

REAL WAGE INDEX END PERIOD TO OCTOBER 1990 74.7 83.1

STATE BUDGET DEFICIT (MILLION USD) 873.6 575.5 -34.1

NOMINAL FOREX RATE (LEI/USD) (PCT) +2.7 +10.8

FOREIGN TRADE (MILLION USD) EXPORTS (FOB) 17,618.0 23,479.0 +33.3 IMPORTS (CIF) 24,003.1 32,588.4 +35.8 DEFICIT (FOB/CIF) (MILLION USD) 6,385.1 9,109.4 +42.7

CUMULATIVE FOREIGN DIRECT INVESTMENT STOCK AT THE END OF THE PERIOD (MILLION USD) 10,365.7 13,573.4 +30.9 OFFICIAL FOREX RESERVES END OF PERIOD* (MILLION USD) 9.400.1 16,215.3 +72.5

*CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, INCLUDED.

18. AmEmbassy Bucharest's reporting telegrams are available on the Bucharest SIPRNet website: www.state.sgov.gov/p/eur/Bucharest/.

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Category: Breaking News
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