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Cablegate: Romania's Economy Charges Ahead, but Inflation Looms As A

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

BUCHAREST 00000491 002 OF 003


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

BUCHAREST 00000491 003 OF 003


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

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