239870 12/15/2009 8:29 09BUCHAREST833 Embassy Bucharest UNCLASSIFIED//FOR OFFICIAL USE ONLY VZCZCXRO6377 PP RUEHIK DE RUEHBM #0833/01 3490829 ZNR UUUUU ZZH P 150829Z DEC 09 ZDK FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 0162 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY UNCLAS SECTION 01 OF 02 BUCHAREST 000833
STATE FOR EUR/CE ASCHIEBE AND EEB/IFD TREASURY FOR JBAKER
E.O. 12958: N/A TAGS: ECON, ETRD, EIND, EFIN, IMF, RO SUBJECT: ROMANIAN ECONOMY: STILL NO RECOVERY IN THE THIRD QUARTER
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Sensitive but Unclassified; not for Internet distribution.
1. (SBU) Summary. While there are signs that this deep recession may have finally hit bottom, the most recent statistics from the Government of Romania (GOR) offer little hope of real recovery in the near term. GDP figures for the first nine months of 2009, released on December 3, show a 7.4 percent decline over the same period in 2008. This is a slightly better performance than most analysts had predicted; GDP in the first six months was off 7.6 percent compared to the year before, meaning that the rate of contraction moderated between June and September. Industrial output, services, and construction all contributed to the drop, while agriculture reported better-than-expected results. The consolidated budget deficit, which includes all central and local government spending, remains a serious concern, but the external deficit is now well within sustainable territory. End Summary.
2. (U) Compared to the 7.6 percent GDP contraction reported as of the end of June, Romania's nine-month 7.4 percent downturn is less bad than analysts expected - and therefore cause for cautious optimism that the recession may have bottomed out in the third quarter. Still, there is widespread sectoral weakness, meaning that real recovery is still a ways off. The nine-month statistics show construction down by 11.9 percent and services declining by 10.3 percent. Within the services sector, financial services held up reasonably well, posting a decline of only 4.9 percent compared to the first nine months of 2008. Despite initial worries a year ago that the global financial contagion would wreak havoc in Romania's banking sector, banks have ridden out the crisis with no failures and have generally posted better-than-expected results. Agriculture, with only a 1.2 percent decline, was the best performer of the period. Fixed capital investments plunged 22.6 percent in the current nine month period, while household consumption dropped 12.2 percent and overall consumption by 11.1 percent. Even if 4th quarter 2009 GDP numbers end up showing modest improvement over the 3rd quarter, it will still undoubtedly be a decline against 4th quarter 2008, meaning final numbers for 2009 will likely show at least an eight percent year-on-year contraction.
3. (U) Declining GDP continues to pummel the GOR's balance sheet, with net tax receipts down 14.9 percent over 2008 and total revenues down 6.7 percent. The weight of GOR revenues in GDP thereby decreased by 1.3 points to 23.3 percent. Among major revenue sources, VAT collection declined by 19.1 percent, reflecting decreasing retail sales and domestic demand. Profit tax collection plunged 16.0 percent due to shrinking business activity, but higher excise tax rates led to a 14.2 percent gain in this category. At the same time that revenues declined, GOR spending rose 7.6 percent against the first nine months of 2008, with total government spending as a share of GDP reaching 28.4 percent. Capital expenditures were down 4.9 percent but interest payments on government bonds skyrocketed by 60.6 percent, reflecting more expensive financing terms for the rising public sector debt. Personnel expenditures continued to rise, up 9.2 percent, despite GOR vows to bring state sector pay and bonuses under control.
4. (U) The revenue outlook remains grim, meaning that the new government expected to be named after the presidential election results are finalized will face unavoidable hard choices to remain on track with Romania's IMF agreement. The consolidated budget deficit jumped from 3.079 billion USD at the end of September 2008 (1.5 percent of GDP) to 8.180 billion USD (5.1 percent of GDP) at the end of September 2009. The deficit should remain below 7.3 percent by the end of 2009 if Romania is to remain on track with its IMF program, although the IMF has already signaled that it expects the deficit to exceed this target by at least 0.5 percent. While the last quarter of the year is traditionally characterized by GOR spending binges, the lack of a fully functioning government and the IMF spotlight may mitigate the tendency somewhat this time around.
5. (U) Romania's external imbalances, a major source of concern in recent years, show dramatic improvement, though the collapse in domestic production and consumption are largely responsible. The nine-month current account deficit (CAD) totaled 4.506 billion USD, down an impressive 77.3 percent compared to 2008. This was due to a 70.8 percent decline in the trade deficit, with imports falling much faster than exports. The CAD is now at much more sustainable levels, with foreign direct investment inflows alone exceeding the deficit by 6.4 percent. Among other major indicators, the latest annual inflation figure provided a negative surprise, ticking up to 4.65 percent in November after having fallen steadily throughout 2009. This was due primarily to higher energy prices and to retailers passing higher excise tax rates on to consumers. A reversal in the inflation trend, even if temporary, makes it harder for the National Bank of Romania to continue with the process of
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monetary easing to help stimulate the economy.
6. (SBU) Comment. While the economy may have hit bottom in the 3rd quarter, Romania is still in the midst of a severe recession and faces a long road to dig itself out. The biggest challenges looming for 2010 are to right-size the government bureaucracy and bring the deficit under control as agreed with the IMF, without imperiling the economic recovery. The GOR also needs to realign its spending priorities away from current consumption and toward more investment in the educational, social, and physical infrastructure needed to sustain future growth. In a country where the public sector remains too large and costly relative to the size of the economy, that is a tall order. End Comment.
7. (U) ROMANIA'S MACROECONOMIC SCORECARD
INDICATOR JAN-SEP 2008 JAN-SEP 2009 PERCENT CHANGE
INDUSTRIAL OUTPUT VOLUME GROWTH INDEX AGAINST SAME PERIOD, YEAR-EARLIER 104.6 91.5
UNEMPLOYMENT RATE END OF PERIOD (PCT) 3.9 6.9
INFLATION RATE (PCT) CUMULATED FROM THE BEGINNING OF THE RESPECTIVE YEAR 4.6 3.3 REAL WAGE INDEX END PERIOD TO OCTOBER 1990 123.3 123.2
STATE BUDGET DEFICIT (MILLION USD) 3,516.4 8,177.6 132.5
NOMINAL FOREX RATE (PCT) (LEI/USD) -4.9 -0.7 (LEI/EUR) -3.0 -4.2
FOREIGN TRADE (MILLION USD) EXPORTS (FOB) 34,407.5 28,807.9 -16.3 IMPORTS (CIF) 56,568.0 38,236.5 -32.4 DEFICIT (FOB/CIF) (MILLION USD) 22,160.5 9,428.6 -57.5
OFFICIAL FOREX RESERVES END OF PERIOD* (MILLION USD) 42,715.3 44,391.7 +3.9
*CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, INCLUDED.