Wikileaks - MLXXXV

158666 6/18/2008 10:38 08BUCHAREST491 Embassy Bucharest UNCLASSIFIED//FOR OFFICIAL USE ONLY VZCZCXRO2168 PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG DE RUEHBM #0491/01 1701038 ZNR UUUUU ZZH P 181038Z JUN 08 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 8407 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE RUEATRS/DEPT OF TREASURY WASHINGTON DC RUCPDOC/DEPT OF COMMERCE WASHINGTON DC UNCLAS SECTION 01 OF 03 BUCHAREST 000491

STATE FOR EUR/NCE - AJENSEN, EB/IFD STATE PASS USTR FOR LERRION TREASURY FOR LKOHLER USDOC FOR ITA BURGESS/KIMBALL/NAJDI STATE PASS USAID

SENSITIVE SIPDIS

E.O. 12958: N/A TAGS: ECON, ETRD, EIND, EFIN, RO SUBJECT: ROMANIA'S ECONOMY CHARGES AHEAD, BUT INFLATION LOOMS AS A CONCERN

SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET DISTRIBUTION

SUMMARY

1. (U) Defying expectations of a slowdown in light of global conditions, the GOR reported that Romania's economy grew in the first quarter at a very impressive 8.2 percent annual rate over the same period last year. Growth was chiefly driven by the spectacular expansion in construction. However, inflation also accelerated in the same period, driven by both domestic and external factors. The current account deficit continued to rise, driven by the trade deficit. Still, Romania remained popular for investors, as foreign direct investment continued to cover a large share of the current account deficit. See paragraph 13 for a statistical scorecard. End summary.

STRONGER GDP GROWTH

2. (U) Romania's first quarter 8.2 percent GDP growth rate signals that, barring a substantial slowdown later in the year, 2008 annual growth will likely exceed last year's 6 percent rate. Construction grew by a whopping 32.4 percent against the first quarter of 2007, while services were up 7.5 percent over the same period. Services contributed to nearly half of first quarter growth and now account for 52.3 percent of GDP. Industrial activity increased by 5.4 percent to account for 26.7 percent of GDP. Agriculture, despite more favorable expectations, continued to drop, albeit this quarter by only 0.5 percent. Due to the growing economy, tax revenues increased by 9.3 percent and reached a GDP weight of 12.4 percent.

MODERATE INDUSTRIAL OUTPUT GROWTH

3. (U) In the industrial sector, growth was chiefly driven by the energy sector's 9.2 percent increase in output from the first quarter 2007. Manufacturing output rose by 6.1 percent, particularly in tobacco processing, motor vehicles and other means of transportation, printing and publishing, communications equipment, and plastics. Conversely, medical equipment, fine mechanical and optical equipment, electrical machinery, textiles, footwear and leatherwear posted the steepest drops. At the same time, mining sector output declined 3.9 percent.

4. (U) Compared to first quarter 2007, industrial labor productivity increased 8.7 percent. Labor productivity rose 11.2 percent in the energy sector, increased 9.6 percent in the manufacturing sector, and declined 2.3 percent in the mining sector.

CURRENT ACCOUNT DEFICIT STILL RISING, BUT AT SLOWER PACE

5. (U) EXPORTS: Assisted by the Romanian leu's 3.0 percent depreciation against the euro during the quarter, Romanian export growth continued to increase at impressive rates, up 13.5 percent in euros from the same quarter, 2007. Interestingly, growth in exports was higher to non-EU countries, up 21.6 percent, while Romanian exports to the EU-27 community rose 10.4 percent. Still, the EU-27 market accounted for 70.4 percent of Romanian total exports, a majority share which has continued to expand since Romania joined the EU in January 2007. Machinery and transportation equipment were the top Romanian exports in 2007. Romanian exports to the U.S. amounted to USD $184.3 million, accounting for 1.6 percent of total exports. This was down 1.8 percent from first quarter 2007, reflecting in part the toll of the leu's appreciation against the U.S. dollar over the last year.

6. (U) IMPORTS: Romanian imports continued to expand, although at a lower rate of growth reflecting the leu's moderate depreciation against the euro. Imports were up 12.2 percent compared with first quarter 2007, of which EU suppliers accounted for 69.9 percent. Machinery and transportation equipment were also the top Romanian imports. Imports from the U.S. went up 45 percent, assisted by a weaker dollar, but still only accounted for 1.3 percent of the total.

7. (U) CURRENT ACCOUNT DEFICIT: The first quarter current account deficit totaled 5.2 billion USD, a 26.1 percent increase but still a lower rate of growth than in the same period last year. The bigger deficit was chiefly driven by a higher trade deficit (up 19.2 percent), net factor income deficit (up 26.1 percent), and a drop in the services surplus. The leu's depreciation against the euro may have added to inflationary pressure, but it has also benefited the current account because otherwise the deficit growth would have been steeper. Foreign direct investment inflows compensated for 47.6

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percent of the first quarter current account deficit, up from 43 percent in the first quarter of 2007.

FOREIGN INVESTMENT FLOWS REMAIN STRONG

8. (U) The total net stock of foreign direct investments (FDI) between 1990 and end-March 2008 amounted to 25.2 billion USD, up 22.7 percent from end-March 2007. Top investing countries since 1990 are the Netherlands (21.5 percent of the total), Austria (12.6 percent), Germany (12 percent), France (9.9 percent), Italy (4.7 percent), Cyprus (4.0 percent), and the U.S. (3.7 percent). At the end of March 2008, the U.S. investment stock amounted to $931.1 million, up 6.8 percent over the same period in 2007. (NOTE: These official statistics fail to capture the full extent of U.S. investment in Romania, as many U.S. firms conduct investments through European divisions or subsidiaries and thus aren't counted as U.S.-source investment. A similar, though smaller-scale, phenomenon exists on the trade side, where intra-company trade among U.S. subsidiaries in Europe is not counted as Romanian trade with the U.S. The actual U.S. investor contribution to Romanian growth and development is therefore larger. End note.)

INFLATION AND WAGES UP, UNEMPLOYMENT DOWN FROM 2007

9. (U) Annualized inflation continued to run well in excess of the National Bank of Romania's (BNR) announced 3.8 percent target for 2008, hitting 8.6 percent at the end of March. Actual first quarter inflation was 2.25 percent, led by increases in the cost of services (3.6 percent), non-food items including energy (2.1 percent), and foodstuffs (1.7 percent). Major external factors behind these poor results included high crude oil prices; natural gas and thermal energy price increases; the leu's depreciation against the euro; and price increases for foodstuffs on international markets. Aggravating internal factors were the after-effects from last year's poor agricultural output; increasing labor costs; and non-government credit growth.

10. (U) The official unemployment rate registered 4.2 percent in March 2008, up slightly from 4.1 percent at the end of December but still down significantly from 4.8 percent in March 2007. Labor emigration has remained a leading factor in this trend. The official real wage index reached 116.0 in March (measured against the 1990 base of 100). It was up from 107.1 in March 2007, due to the higher net salaries across the board and skilled labor shortages. The March 2008 average net salary was up 17.7 percent from March 2007.

RECORD HIGH OFFICIAL FOREX RESERVES

11. (U) Official foreign exchange (forex) reserves hit a record-high 40.4 billion USD, up 31 percent against end-March 2007. This was largely due to income from BNR's administration of international reserves, and from increased forex minimum reserves for the commercial banks with BNR. Romania's 2008 foreign direct and public guaranteed debt service amount remains unchanged at euro 1,837.4 million.

COMMENT

12. (SBU) Romania's first quarter results featured solid growth, but with early indications that long-term growth is at risk due to inflation and the rising (albeit at a slower rate) current account deficit. Post has heard anecdotal evidence that the GOR's slow rate of investment in infrastructure, especially for transportation, is beginning to impact the decisions of foreign investors. With FDI flows providing a critical counter-balance to such a large portion of Romania's current account deficit, any significant slowdown in the FDI growth rate will have an immediate impact on GDP growth. To forestall a retreat by foreign investors, the GOR needs to demonstrate that it is taking serious steps to improve Romania's obsolete, bursting-at-the-seams infrastructure stock. End comment.

13. (U) ECONOMIC PERFORMANCE SCORECARD

INDICATOR JAN-MAR 2007 JAN-MAR 2008 PERCENT CHANGE

INDUSTRIAL OUTPUT VOLUME GROWTH RATE AGAINST SAME PERIOD, YEAR-EARLIER (PCT) 7.7 5.4

UNEMPLOYMENT RATE

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END OF PERIOD (PCT) 4.9 4.2

INFLATION RATE (PCT) CUMULATED FROM THE BEGINNING OF THE YEAR 0.3 2.2

REAL WAGE INDEX END PERIOD TO OCTOBER 1990 107.1 116.0

STATE BUDGET BALANCE (MILLION USD) -1,643.2 -1,689.8 +2.8

NOMINAL FOREX RATE (LEI/USD) +2.0 +4.1 (LEI/EURO) (PCT) +0.9 -3.0

FOREIGN TRADE (MILLION USD) EXPORTS (FOB) 9,303.2 11,868.4 +27.6 IMPORTS (CIF) 14,604.3 19,094.2 +30.7 DEFICIT (FOB/CIF) (MILLION USD) 5,301.1 7,225.8 +36.3

OFFICIAL FOREX RESERVES END OF PERIOD* (MILLION USD) 30,864.0 40,429.2 +31.0

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

TAUBMAN