212085 6/15/2009 9:17 09BUCHAREST396 Embassy Bucharest UNCLASSIFIED//FOR OFFICIAL USE ONLY VZCZCXRO8614 PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG DE RUEHBM #0396/01 1660917 ZNR UUUUU ZZH P 150917Z JUN 09 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 9597 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY UNCLAS SECTION 01 OF 02 BUCHAREST 000396
STATE FOR EUR/CE ASCHIEBE AND EEB/IFD TREASURY FOR JBAKER AND LKOHLER
E.O. 12958: N/A TAGS: ECON, ETRD, EIND, EFIN, RO SUBJECT: ROMANIA: SHARP Q1 2009 CONTRACTION AFTER TEN BOOMING YEARS
Sensitive but Unclassified; Not for Internet Distribution.
1. (U) Summary. Romania's economy posted a steep and widely anticipated drop in GDP growth in the first quarter (Q1) of 2009 according to official statistics released on June 9th by the National Statistics Institute (INS). The economy showed a 6.2 percent decline overall against the first quarter of 2008. The pain was widely felt throughout the economy, with nearly all sectors contracting. On a positive note, sharply lower imports helped bring down the current account deficit (CAD) to more manageable levels. After peaking at 14 percent of GDP in 2007, the CAD fell abruptly on an annualized basis to seven percent of GDP in Q1 2009. End summary.
2. (U) Romania's 6.2 percent contraction in Q1 2009 represented a continuation of the dramatic slowdown which began in the final quarter of 2008. Official unemployment, while still relatively low at 5.6 percent, has been on an upward trend due to incipient weakness in the service and other sectors. (Note: Official employment figures don't capture the full picture in the labor market, as underemployment remains a widespread problem and black market activity, according to some analysts, may account for as much as a third of GDP. End note.) A weakening leu counteracted gradually slowing consumer demand (down 0.5 percent since Q4 2008) to keep inflation at a steady annualized rate of 5.4 percent. The Government of Romania (GOR) posted a consolidated budget deficit of 1.5 percent of GDP in Q1, bucking the trend of previous fiscal years of remaining in surplus until the last quarter.
3. (U) The hardest hit sector in Q1 was agriculture, forestry and fisheries, declining by 7.6 percent since Q4 2008 and 10.9 percent compared to Q1 2008. While the impact of this decline was relatively modest given the low weight in the GDP (6.4 percent), underinvestment in agriculture continues to act as a brake on Romania's potential. Despite fertile cropland, the on-going failure to consolidate and adopt modern farming methods has kept Romania (where nearly 30 percent of the population is engaged in agriculture) a net food importer. Manufacturing, which accounts for 24.4 percent of GDP, responded to weaker demand in export markets by posting a modest 1.4 percent decline from Q4 2008 (when the drop was much steeper), but equaling a huge 11.1 percent slowdown compared with Q1 2008. Retail, hotels, restaurants, transportation, and communications dropped 7.5 percent from Q1 2008 and 3.7 percent against the last quarter of 2008. Financial services were down 3.8 percent against Q1 2008, but recovered slightly against the very poor Q4 2008 performance. Government and other services grew by 3.1 percent from the same quarter 2008 and 0.1 percent from the last quarter, 2008, reflecting continued GOR deficit spending in a bid to shore up the economy. While construction was up 4.7 percent against Q1 2008, this reflects the tail-end of Romania's construction boom which steadily accelerated through Q3 2008 only to taper off quickly at year's end. The overall trend is negative, with the sector declining by 0.3 percent when compared with Q4 2008.
4. (U) Government revenues declined in lockstep with the economy, with net tax revenues falling by 9.4 percent against Q1 2008. Household consumption fell by 12.3 percent and total final consumption was lower by 9.1 percent. Fixed capital formation (investments) slightly decreased from Q1 2008, down 0.3 percent. The drop, however, is a much more significant 7.1 percent if compared to Q4 2008. This was caused in part by the late approval of the annual budget, the slowing the pace of public sector investments, as well as by an overall reduction in the availability of credit.
5. (U) The Q1 2009 CAD amounted to the equivalent of USD 921.7 million, down 84.4 percent in USD from the same period, year before. Unfortunately for Romania, this positive adjustment only happened because imports fell precipitously, and at a faster rate than exports. Still, some foreign direct investment flows have continued to come in, fully covering the CAD in Q1. This represents a marked improvement to the 42.8 percent coverage in Q1 2008. A lingering appetite for imported goods and a weakened currency accounted for much of the deficit, although the trade deficit did decline by 71.4 percent overall. Lower credit and decelerating demand will likely lead to another decline in the second quarter deficit. On a less positive note, the surplus in current transfers fell 16 percent from the same period in 2008 due to international labor market problems. Remittance income has provided a major prop to domestic consumption and functioned as a sort of social safety net for rural areas, making any sustained reduction worrisome.
6. (SBU) Comment. After years of sustained high growth, Romania's economy has fallen abruptly into a painful recession. The lower
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availability of credit, a weakening currency, and shrinking consumption make the odds for a sharp revival in the second half of the year remote. The best hope is that the biggest decline has already happened, and the downward trend will moderate and then stabilize in the second half of 2009. The injection of IMF funds should ease the strains in the financial sector, but the IMF program also constrains the GOR's ability to boost stimulus spending. With no strong growth drivers on the horizon, the outlook is cloudy. The downturn has shown that Romania is more integrated into the EU and the broader world economy than would appear at first blush, given the large share of domestic production and consumption in GDP. A weak export market, extremely tight bank lending, and a modest decline in remittances have all contributed to current weakness. As such, it will probably take a resumption of domestic credit growth, renewed investment flows, and a demand revival in Romania's main export markets to restart the growth engine here. Prospects for a recovery in 2009 appear remote. End comment.
7. (U) ROMANIA'S MACROECONOMIC SCORECARD
INDICATOR Jan-Mar 2008 Jan-Mar 2009 PERCENT CHANGE
INDUSTRIAL OUTPUT VOLUME GROWTH RATE AGAINST SAME PERIOD, YEAR-EARLIER 5.4 -11.1
UNEMPLOYMENT RATE END OF PERIOD (PCT) 4.2 5.6
INFLATION RATE (PCT) CUMULATED FROM THE BEGINNING OF THE RESPECTIVE YEAR 2.2 2.6
REAL WAGE INDEX END PERIOD TO OCTOBER 1990 116.0 127.9
STATE BUDGET DEFICIT (MILLION USD) 1,689.8 3,069.0 +81.6
NOMINAL FOREX RATE (LEI/USD) (PCT) +4.1 -12.3 (LEI/EURO) (PCT) -3.0 -6.3
FOREIGN TRADE (MILLION USD) EXPORTS (FOB) 11,868.4 8,529.3 -28.1 IMPORTS (CIF) 19,094.2 11,123.7 -41.7 DEFICIT (FOB/CIF) (MILLION USD) 7,225.8 2,594.4 -64.1
CUMULATIVE FOREIGN DIRECT INVESTMENT STOCK AT THE END OF THE PERIOD (MILLION USD) 25,233.2 30,612.7 21.3
OFFICIAL FOREX RESERVES END OF PERIOD* (MILLION USD) 40,429.2 36,202.3 -10.5 *CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, INCLUDED.