226271 9/22/2009 9:08 09BUCHAREST642 Embassy Bucharest UNCLASSIFIED//FOR OFFICIAL USE ONLY 09BUCHAREST396|09BUCHAREST563 VZCZCXRO1157 PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK RUEHYG DE RUEHBM #0642/01 2650908 ZNR UUUUU ZZH P 220908Z SEP 09 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 9909 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY UNCLAS SECTION 01 OF 02 BUCHAREST 000642
STATE FOR EUR/CE ASCHIEBE AND EEB/IFD TREASURY FOR JBAKER AND LKOHLER
E.O. 12958: N/A TAGS: ECON, ETRD, EIND, EFIN, IMF, RO SUBJECT: ROMANIA: ECONOMY STILL IN DEEP RECESSION
REF: A) BUCHAREST 396 B) BUCHAREST 563
Sensitive but Unclassified; not for Internet distribution.
1. (SBU) Summary. Recent Government of Romania (GOR) statistics confirm that the economy remains in the grip of a deep recession. GDP contracted even faster in the second quarter (Q2) than in the first, with the cumulative slide for the first half (H1) of 2009 reaching 7.6 percent. The construction and services sectors were particularly hard hit. Consumption dropped again in Q2 while the GOR's budget deficit grew dramatically. One potential bright spot amid the gloom is the rapid downward adjustment in both the external deficit and inflation, setting the stage for renewed growth once demand picks back up in Romania's export markets. End summary.
2. (U) After falling 6.2 percent in Q1 compared to the same period in 2008, Romania's GDP shrank at an accelerated rate of 8.7 percent in Q2 for an overall H1 decline of 7.6 percent. Construction was down 11 percent in Q2, while trade, commerce, and financial services all declined in excess of four percent. Manufacturing output posted a modest improvement over dismal Q1 numbers but was still down 7.3 percent from Q2 2008 levels. Any hopes for a quick recovery were further dimmed by a big 13.2 percent drop in household consumption compared to Q2 2008.
3. (SBU) The severity of the recession has left GOR finances in disarray. Tax revenues are down substantially, led by a 15.7 percent drop in VAT receipts (the GOR's single biggest source of income). Corporate income tax receipts dropped eight percent and customs duties 37.4 percent due to the collapse in trade. Property tax income actually rose 9.0 percent due to higher local tax rates but was not enough to offset other revenue shortfalls. At the same time, overall government outlays rose 5.6 percent even as capital expenditures declined. Higher spending on unemployment and other social benefits accounted for some of the increase, but the biggest contributor was a 12.0 percent jump in H1 government personnel expenditures -- testament to the GOR's continued difficulties in reigning in public sector personnel costs despite the agreement with the IMF.
4. (U) More spending and less revenue pushed the 2009 fiscal deficit to more than four percent of GDP through August. To finance this deficit, the Ministry of Finance (MOF) has sold more than 52 billion lei (about USD $17.7 billion) in T-bills through the first of September, over four times the amount sold in the same period last year. GOR interest payments on the public debt were up 55.5 percent in H1. Virtually all of the debt, with maturities of three to six months at interest rates ranging from 10 to 12 percent, is bought by commercial banks which currently prefer the safe haven of GOR treasuries to riskier consumer and business lending. As a result, IMF money deposited to the Central Bank (BNR) has had little stimulative effect on the economy, since corresponding relaxation of BNR compulsory reserves for banks has largely gone to finance the deficit rather than being lent in the real economy. Many previously profitable businesses have been left without stable access to affordable credit.
5. (U) Amidst the gloom, economic analysts are cheered that the recession has forced much-needed corrections in Romania's high inflation and current account deficit (CAD). After approaching 14 percent of GDP in 2007 and still over 12 percent in 2008, the CAD has dropped by 73.3 percent so far this year due to sharply lower imports. This is faster than predicted, and analysts are optimistic that the deficit will end 2009 at a much more sustainable 5-6 percent of GDP. At that level, foreign remittances and investment inflows cover the entire CAD; in H1 Romania drew five billion euros in FDI alone despite the recession. Inflation, which hit nearly 10 percent in 2008, will fall to around 4.5 percent by the end of 2009, allowing BNR to continue a policy of gradual monetary easing. Romania's high external imbalances helped precipitate the current crisis; the economy will be better positioned to resume growth after the steep correction this year.
6. (SBU) Comment. GOR and private sector analysts are cautiously hopeful that the second and third quarters of 2009 mark the bottom of Romania's recession. Negative GDP growth is still expected in the fourth quarter, but at a reduced rate, followed by a return to very modest positive growth in 2010. The strength of a recovery will depend on how quickly demand picks up in major Western European export markets, foreign investors return in substantial numbers, and Romanian consumers start spending again. This, in turn, will be influenced by how soon commercial banks get back to lending money. Looming as a major question mark for the economy is the outcome of the year-end presidential election, coupled with Romania's track record over the next few months in doing the heavy political lifting to implement major structural reforms under the IMF program.
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Investors will be watching closely. End comment.
8. (U) ROMANIA'S MACROECONOMIC SCORECARD
INDICATOR Jan-Jun 2008 Jan-Jun 2009 PERCENT CHANGE
INDUSTRIAL OUTPUT VOLUME GROWTH RATE AGAINST SAME PERIOD, YEAR-EARLIER 6.1 -10.8
UNEMPLOYMENT RATE END OF PERIOD (PCT) 3.8 6.0
INFLATION RATE (PCT) CUMULATED FROM THE BEGINNING OF THE RESPECTIVE YEAR 3.6 3.1 REAL WAGE INDEX END PERIOD TO OCTOBER 1990 122.3 125.2
STATE BUDGET DEFICIT (MILLION USD) 3,048.4 4,905.4 +60.9
NOMINAL FOREX RATE (LEI/USD) (PCT) +6.1 -4.9 (LEI/EURO) (PCT) -0.8 -5.5
FOREIGN TRADE (MILLION USD) EXPORTS (FOB) 25,627.5 17,795.5 -30.6 IMPORTS (CIF) 42,142.2 23,484.0 -44.3 DEFICIT (FOB/CIF) (MILLION USD) 16,514.7 5,688.5 -65.6
CUMULATIVE FOREIGN DIRECT INVESTMENT STOCK AT THE END OF THE PERIOD (MILLION USD) 27,140.6 31,835.8 17.3
OFFICIAL FOREX RESERVES END OF PERIOD* (MILLION USD) 41,127.9 38,157.7 -7.2 *CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, INCLUDED.