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Cablegate: Romanian Economy Appears On Good Trajectory

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 BUCHAREST 000721

SIPDIS

STATE FOR EUR/NCE - WSILKWORTH, EB/IFD
STATE PASS USTR
USTR FOR LERRION
TREASURY FOR STUART
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL
STATE PASS USAID

E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN RO
SUBJECT: ROMANIAN ECONOMY APPEARS ON GOOD TRAJECTORY


1. Summary: Romania made impressive economic progress in
2004, demonstrating strong GDP growth, curbing inflation and
lowering unemployment. On the negative side, strong
consumer demand fueled a growing current account deficit as
Romania's trade deficit rose due to surging imports. The
country appears to have put itself firmly in a growth mode,
but it must watch carefully its current account deficit. A
strengthening currency will help in meeting inflation
targets. End Summary.

A Good Year
-----------
2. Romania posted a post-communist record 8.3 percent
economic growth in 2004 with total GDP of $73.2 billion, in
excess of $70 billion for the first time. An excellent
agricultural harvest and a construction boom were the main
engines of this growth. Industrial output increased largely
due to expansion in the processing sectors. Inflation
dropped from 14.1 percent in 2003 to 9.3 percent last year -
the first single-digit annual inflation rate posted since
1989. Official foreign exchange (forex) reserves reached
record highs at the end of 2004, representing 5.2 import
months, up from 4.1 months at the end of 2003. (See
paragraph 17 for statistical scorecard).

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Consumer Demand Assists GDP Growth
----------------------------------
3. Growth in the agricultural sector, up 22.2 percent, and
construction, up 9.0 percent, were the largest contributors
to strong GDP in 2004. Industrial output increased 5.3
percent; industries showing significant growth included
manufacturing, wood processing, chemicals, transportation,
electric equipment, and construction materials. Lower
outputs were posted in the medical, precision and optical
equipment, as well as food and beverage industries. The
mining output rose 2.4 percent, while energy output dropped
3.2 percent against 2003. Extremely favorable crop
conditions resulted in the 22 percent growth in the
agricultural sector. However, in the absence of a viable
irrigation system, this stellar agricultural performance is
not sustainable for the long term.

4. Final consumption rose 10.3 percent and investments grew
faster than the overall GDP. However, investment as a share
of GDP still is low at 25 percent.

Record Trade Deficits
---------------------
5. Romanian exports posted record levels, up 33.8 percent
in USD and 21.3 percent in Euro, in comparison with 2003.
For the first time Romanian exports exceeded $20 billion.
This export performance is all the more striking, given that
the Romanian Leu (ROL) appreciated both against the USD - by
10.8 percent, and the Euro - by 3.5 percent. This
appreciation hindered Romanian exports while assisting
importers. Italy, Germany, France, Turkey and the U.K. have
remained the primary markets for Romanian exports. Romanian
exports to the EU rose 7.2 percent last year. The EU's
enlarged market accounted for 72.9 percent of Romanian total
exports, up from the 67.7 percent in 2003. Romanian exports
to the U.S. reached $668.5 million, up 7.3 percent, and
comprised 2.8 percent of total Romanian exports, in
comparison with 3.5 percent in 2003.

6. Textiles and apparel topped the list of Romanian
exports, at 22.3 percent, increasing 17 percent to $5.2
billion. However, textile exports are on a clear downward
trend. Their weight has decreased from one third of total
exports in 2002 to 25.4 percent in 2003, as local wages have
moved upward, resulting in less attractive finished product
costs. Machinery and equipment, 17.6 percent of total
exports, soared 45.6 percent, and metal products, 15.4
percent of total exports, increased an impressive 62.9
percent. Romanian exporters fear that 2005 may witness a
halt of export growth, due to ROL appreciation and the
redirection of company resources as production facilities
are upgraded to bring goods up to EU standards.

7. While Romanian exports exceeded $20 billion in 2004,
Romanian imports broke the $30 billion record. Imports were
driven mainly by a relative absence of domestic supply that,
along with more favorable financing terms, boosted non-
government credit by 38 percent. Machinery and equipment
topped Romanian imports with a 23.8 percent share of
imports, representing a 35.0 percent increase over 2003.
This trend was fueled by the Romanian corporate sector's
appetite for modern technologies and pent-up durable goods
demand. Textiles, minerals, transportation and chemicals
were also top imports. Due to attractive prices and an
increasingly wide range of choices, motor-vehicle imports
saw the most spectacular increase - 103.2 percent compared
with 2003. Romanian imports continued to arrive primarily
from Italy, Germany, France and Russia. The percentage of
suppliers from the now enlarged European Union was 64.9,
compared with 57.7 percent in 2003. Significantly, U.S.
exports to Romania surged to $933 million, up 67.1 percent
from 2003. These U.S. goods comprised 2.9 percent of total
Romanian imports, up from 2.3 percent at the end of 2003.

8. The 2004 current account deficit of $5.458 billion rose
57.8 percent in USD, or 43.8 percent in Euros, against 2003.
This was largely driven by the strong increase in the goods
and services deficit, up 56 percent in USD terms, and,
income deficit, up 25.2 percent in USD. The increase in the
current transfers surplus, up 35.1 percent, could not offset
the deficit surge. Aside from the goods trade deficit, the
main drivers of the worsening current account deficit were a
23.6 percent drop in the international transportation
surplus and 13.8 percent deterioration of the international
tourism deficit. The International Monetary Fund (IMF)
views the current account deficit of nearly 7.5 percent of
GDP as a matter of concern. The increasing 2004 foreign
direct investment comprised approximately 39.5 percent of
the current account deficit. This amount, however, is
relatively small when compared to current transfers that
covered about 56.7 percent of the current account deficit.

Single-Digit Inflation at Last: Can it last?
--------------------------------------------
9. For the first time in 15 years, Romania succeeded in
posting annual inflation below ten percent, to 9.3. The
GOR's nine percent target rate was only slightly exceeded by
0.3 percent. Price increases in non-food goods drove
inflation. The 2003 monthly average retail inflation rate
was 0.7 percent, compared to 1.1 percent in 2003. The ROL's
appreciation, a good agricultural year, and the former GOR's
reluctance to adjust public utility prices on the eve of
general elections offset increasing international crude
prices.

10. The official unemployment rate dropped to 6.2 percent
in December 2004, down from 7.4 percent a year earlier.
This was primarily due to expansion in the manufacturing,
construction, agriculture, and retail industries. Also,
continuing significant labor migration abroad represented
another major factor in maintaining the lower local
unemployment rate.

Tight Budget Execution
----------------------
11. Improved revenue collection and tighter controls on
spending caused Romania's consolidated budget deficit to
fall to $834.5 million, representing 1.2 percent of GDP,
lower than both the 2003 2.4 percent deficit and the 1.64
percent annual target. Consolidated budget revenues
amounted to $21.7 billion, up 25.4 percent when compared
with 2003, whereas consolidated budget expenditures amounted
to $22.5 million, up 22.3 percent from last year. Local
governments' 2004 surpluses amounted to a total of $117.9
million, against a 2003 deficit in the amount of $4.3
million. However, the 2004 social assistance budget
deteriorated to a $4.2 million deficit, from a previous 2003
surplus of $53.3 million. Increasing revenues due to
economic growth, higher sales and excise collections, more
focus on tax collection, and tighter spending monitoring
under the IMF's microscope resulted in a lower 2004
consolidated budget deficit.

Foreign Investments Inching Up
------------------------------
12. The net stock of foreign direct investment (FDI)
between 1990 and 2004 amounted to slightly over $13.57
billion, up 30.9 percent from 2003. Leading country
investors were the Netherlands (with 15.5 percent of the
total investment since 1990), Austria (12.2 percent), France
(11.1 percent), Germany (8.0 percent), the U.S. (6.5
percent), and Italy (5.2 percent). Nonetheless, Romania's
foreign direct investment per capita of merely $148.5
demonstrates that Romania has not yet become a favored
destination for foreign investors. U.S. investment in 2004
rose 26.1 percent to $888.4 million, although the percentage
weight shrank from 6.8 to 6.5 and the U.S.'s rank fell from
fourth to fifth place, due to Austrian petroleum company
OMV's purchase of the national oil company Petrom.

13. At the end of December 2004, total foreign portfolio
inflows jumped 47.0 percent reaching $249.5 million;
outflows rose 65.5 percent to $165.5 million. During 2004,
total purchases performed by foreign investors on the
Romanian capital markets soared 68.8 percent to $321.1
million, while their total local sales jumped 71.5 percent
to $209.8 million. The trend was positive, encouraged by
the increasing potential of this emerging capital market.

Privatization Continues
-----------------------
14. In 2004, the State Asset Resolution Authority (AVAS)
sold 62 medium and large companies in which the state was a
majority shareholder. In addition to these transactions,
AVAS privatized minority stakes in 85 companies, resulting
of total revenues to AVAS in the amount of $381.2 million.
The largest single privatization that occurred in Romania
last year was the Ministry of Economy and Trade's sale of
the national oil company, PETROM, to Austria's OMV, for
about 680 million euros. Approximately another 830 million
euros was pledged for capital investment.

A Capital Market Ready to Take Off?
-----------------------------------
15. Throughout 2004, Romania's capital markets displayed
increasing dynamism. The number of shares traded increased
2.85 times and overall market capitalization doubled in USD
terms reaching $12.9 billion by the year's end. Average
daily turnover jumped to $3.7 million, a substantial
increase from 2003's $1.2 million. Declining interest rates
increased investor appetite for stock market plays, while
the number of listed securities continued to grow and
diversify. Banking and oil stocks saw the highest trading
volumes. Bucharest's two stock exchanges are scheduled to
merge in 2005, subsequent to the Bucharest Stock Exchange's
expected incorporation. Trading volume is likely to
steadily increase in 2005 as initial public offerings of
stock and bonds in a wide range of industries are expected
to occur, including public utilities.

Comment
-------
16. Slashing inflation was the GOR's greatest macroeconomic
achievement in 2004; whether this downward trend will
continue in the face of increasing pressures remains to be
seen. The IMF's recommended public utility tariff increases
will, however, add to the price level. Working in favor of
contained or even lower inflation will be the Central Bank's
policy of allowing the forex market to adjust the price of
the ROL upward against the dollar and Euro.

17. ROMANIA'S MACROECONOMIC SCORECARD
--------------------------------------------- --------------
INDICATOR 2003 2004 PERCENT CHANGE
--------------------------------------------- --------------
INDUSTRIAL OUTPUT
VOLUME GROWTH RATE
AGAINST SAME PERIOD,
YEAR-EARLIER 3.4 5.3

UNEMPLOYMENT RATE
END OF PERIOD (PCT) 7.4 6.2

INFLATION RATE (PCT)
CUMULATED FROM THE
BEGINNING OF THE
RESPECTIVE YEAR 14.1 9.3

REAL WAGE INDEX
END PERIOD TO
OCTOBER 1990 74.7 83.1

STATE BUDGET
DEFICIT
(MILLION USD) 873.6 575.5 -34.1

NOMINAL FOREX
RATE (LEI/USD)
(PCT) +2.7 +10.8

FOREIGN TRADE
(MILLION USD)
EXPORTS (FOB) 17,618.0 23,479.0 +33.3
IMPORTS (CIF) 24,003.1 32,588.4 +35.8
DEFICIT (FOB/CIF)
(MILLION USD) 6,385.1 9,109.4 +42.7

CUMULATIVE FOREIGN
DIRECT INVESTMENT
STOCK AT THE END OF
THE PERIOD
(MILLION USD) 10,365.7 13,573.4 +30.9
OFFICIAL FOREX RESERVES
END OF PERIOD*
(MILLION USD) 9.400.1 16,215.3 +72.5

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

18. AmEmbassy Bucharest's reporting telegrams are available
on the Bucharest SIPRNet website:
www.state.sgov.gov/p/eur/Bucharest/.

Delare

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