Cablegate: Romania: Fdi Still Flowing for Now, but New Prospects May

VZCZCXRO0531
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBM #0953/01 3430637
ZNR UUUUU ZZH
P 080637Z DEC 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 8997
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000953

STATE FOR EUR/CE - ASCHIEBE
TREASURY FOR LKOHLER

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON PGOV PREL RO
SUBJECT: ROMANIA: FDI STILL FLOWING FOR NOW, BUT NEW PROSPECTS MAY
BE DRYING UP

Sensitive but Unclassified, not for Internet distribution.

SUMMARY

1. (SBU) The high levels of foreign direct investment (FDI) which
have fueled economic growth and provided substantial cover for
Romania's big current account deficit will likely dwindle in the
coming months. While FDI already in the pipeline is expected to
continue to flow over the next few months, prospects look bleaker
for the second half of 2009. The slowdown in investment is already
having a noticeable impact on the manufacturing and petrochemicals
sectors, while the booming retail trade sector appears so far
unscathed. Overall, however, it is clear that many foreign
companies are reducing the pace of production and rethinking
investment decisions in anticipation of tougher times ahead. End
Summary.

2. (U) Romania has a looming current account imbalance, with the
deficit likely to reach 14 percent of GDP in 2008. This deficit has
been fueled by high levels of domestic consumption and financed in
part by substantial FDI inflows. Statistics for the first three
quarters of 2008 show that FDI inflows covered 56.6 percent of the
current account deficit, with foreign remittances and commercial
borrowing accounting for much of the remainder. Until recently,
investors have been willing to bet on continued growth in the
Romanian market, where rates of expansion have been among the
highest in Europe for several years running. However, as the global
financial crisis takes its toll and liquidity has dried up in
international markets, many foreign investors are being forced to
rethink their plans.

MANUFACTURING DOLDRUMS

3. (U) Identified by Prime Minister Calin-Popescu Tariceanu as a
pillar of the new Romanian economy, the automotive manufacturing
sector is in Romania for the long haul but is facing near-term bumps
in the road. Renault-owned Dacia has announced that it will
continue investing in a new Romanian design center. For its part,
Ford of Europe has insisted that, despite parent company troubles in
North America, it will still invest 57 million euros in the Craiova
plant it acquired this year. Ford has announced no changes to its
plans to begin producing Transit Connect vans in late 2009 and a new
small car for the European market at a later date. At the same
time, production in existing facilities is slowing significantly,
with Renault planning to idle the Dacia factory in Pitesti for most
of December due to low demand. As a direct result, suppliers, such
as tire manufacturers Continental and Michelin, are reducing their
own output from Romanian facilities.

4. (U) Meanwhile, the steel, aluminum, and petrochemical industries
have experienced some of the quickest drops in demand as a result of
difficulties on the international market. Dependent largely on
exports, Arcelor Mittal has announced that softening worldwide
demand would force it to temporarily reduce output by 50 percent at
its Galati-based steel mill. This is having a major impact on
subcontractors and service providers, who depend on the plant for
much of their revenues. Similarly, Samsung-owned steel producer
Otelinox has suspended operations for November and December.

5. (U) There is more bad news from the petrochemical sector, where
state-owned Oltchim decided to cut production by 40 percent in
November and December. As a result, OMV-controlled Petrom was
forced temporarily to close a subsidiary, Petrochemicals Arges,
almost exclusively dependent on sales to Oltchim. Other
foreign-owned firms, including the fertilizer producer Azomures,
Rompetrol Petrochemicals, and Donau Chem, have announced their own
production cuts of up to 50 percent and temporary layoffs.

6. (U) The picture is more nuanced when it comes to consumer goods
manufacturing. Recently, Romania has lost some major investments to
other countries: Kraft is relocating a candy factory to Bulgaria,
and Colgate-Palmolive is closing a plant to consolidate production
in Poland. At the same time, other previously-announced
investments, such as Procter and Gamble's new facility in Urlati,
are proceeding apace, albeit on a slightly smaller scale than
originally conceived. Companies are clearly anticipating slower
demand in European markets, and some are concluding that the best
place to consolidate production isn't necessarily Romania.

RETAIL TRADE STILL VIBRANT

7. (U) In contrast to manufacturing, the Romanian retail sector,
especially in the supermarket segment, continues to be one of the
most attractive areas for foreign investors. Rather than slowing
down, the various foreign players on the local market are moving
aggressively to capture market share and take advantage of an

BUCHAREST 00000953 002 OF 002

expected eventual rebound. Carrefour of France, the Belgian
Delhaize Group, and German brands Metro and Kaufland have invested
substantial sums in both new construction and in renovating and
rebranding recent acquisitions. No layoffs or slowdowns are
expected in the short term, with the new outlets actually adding up
to 5,000 new jobs across the country in recent months, offsetting at
least some of the job losses elsewhere. However, firms appear more
cautious when looking ahead to the second half of 2009, postponing
final construction decisions on several proposed new outlets outside
of Bucharest.

FINANCIAL SECTOR VERY CAUTIOUS

8. (U) The foreign-dominated Romanian banking sector is experiencing
some fallout from international markets, albeit not as severely as
might be expected given the worldwide credit crunch. The main
effect has been a slowdown in previously aggressive expansion plans
and much tighter standards for new loans, constricting the domestic
credit market. At the same time, banks in Romania have little
exposure to the kinds of "toxic" assets causing pain elsewhere.
Local banks currently average an 11.8 percent solvency ratio, with
an average return on assets currently at 1.81 percent, and an
average return on equity of 19.71 percent. These healthy numbers,
combined with the low financial intermediation levels in Romania and
the highly fragmented and competitive local banking market, suggest
that most banks are still bullish on Romania's long-term prospects.
Banks will act to protect existing market share even if major
expansions have been postponed.

LONG-TERM PERSPECTIVE IN THE ENERGY SECTOR

9. (U) The long timeline for projects in the rapidly growing energy
sector is pushing companies to continue investing in the downturn in
order to be positioned for the eventual turnaround. For instance,
the Czech company CEZ is going ahead with plans to install
GE-manufactured turbines and bring a new wind farm facility on-line
in April 2009. For its part, the Romanian Government remains
aggressive, commissioning new feasibility studies and announcing new
joint ventures with foreign partners. These include deals involving
coal power producer Termoelectrica and nuclear operator
Nuclearelectrica to build new power generation capabilities in
Romania.

OTHER SECTORS HUNKERING DOWN

10. (U) Anecdotal evidence indicates that most companies in other
sectors are in a wait-and-see mode. In the short term, they hope
that market inertia and the holiday season will keep spending high
through the end of this year. However, nearly everyone is holding
off on announcing significant expansions, fearing that rising
unemployment and deteriorating consumer confidence will hurt sales
in the first half of 2009. A few firms are pushing ahead with
projects already begun. Coca Cola is continuing construction of a
major new warehouse facility near Ploiesti at least in part to avoid
the costs and penalties associated with cancelling the project at
this stage.

COMMENT

11. (SBU) Forecasts for Romania's GDP growth in 2009 range from an
optimistic four percent to a slightly negative 0.3 percent decline.
The wide variation stems in part from the uncertainty still
surrounding the final make-up of the coalition government in the
wake of November 30 parliamentary elections. Many analysts fear
that political instability will adversely impact Romania's
deteriorating fiscal situation. Foreign investors are
understandably nervous at the possibility of a less
business-friendly government, but even more worried that a new
government may not be willing or able to implement the tough
measures Romania needs to stay on a stable, long-term growth path.
If uncertainties persist, foreign investors may start to shift their
scarce capital to safer havens. If this shift gathers steam,
Romania's macroeconomic situation could deteriorate rapidly. End
Comment.

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