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Cablegate: Romania: Economy Still in Deep Recession

VZCZCXRO1157
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHBM #0642/01 2650908
ZNR UUUUU ZZH
P 220908Z SEP 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9909
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000642

SENSITIVE

STATE FOR EUR/CE ASCHIEBE AND EEB/IFD
TREASURY FOR JBAKER AND LKOHLER

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN IMF RO
SUBJECT: ROMANIA: ECONOMY STILL IN DEEP RECESSION

REF: A) BUCHAREST 396 B) BUCHAREST 563

Sensitive but Unclassified; not for Internet distribution.

1. (SBU) Summary. Recent Government of Romania (GOR) statistics
confirm that the economy remains in the grip of a deep recession.
GDP contracted even faster in the second quarter (Q2) than in the
first, with the cumulative slide for the first half (H1) of 2009
reaching 7.6 percent. The construction and services sectors were
particularly hard hit. Consumption dropped again in Q2 while the
GOR's budget deficit grew dramatically. One potential bright spot
amid the gloom is the rapid downward adjustment in both the external
deficit and inflation, setting the stage for renewed growth once
demand picks back up in Romania's export markets. End summary.

2. (U) After falling 6.2 percent in Q1 compared to the same period
in 2008, Romania's GDP shrank at an accelerated rate of 8.7 percent
in Q2 for an overall H1 decline of 7.6 percent. Construction was
down 11 percent in Q2, while trade, commerce, and financial services
all declined in excess of four percent. Manufacturing output posted
a modest improvement over dismal Q1 numbers but was still down 7.3
percent from Q2 2008 levels. Any hopes for a quick recovery were
further dimmed by a big 13.2 percent drop in household consumption
compared to Q2 2008.

3. (SBU) The severity of the recession has left GOR finances in
disarray. Tax revenues are down substantially, led by a 15.7
percent drop in VAT receipts (the GOR's single biggest source of
income). Corporate income tax receipts dropped eight percent and
customs duties 37.4 percent due to the collapse in trade. Property
tax income actually rose 9.0 percent due to higher local tax rates
but was not enough to offset other revenue shortfalls. At the same
time, overall government outlays rose 5.6 percent even as capital
expenditures declined. Higher spending on unemployment and other
social benefits accounted for some of the increase, but the biggest
contributor was a 12.0 percent jump in H1 government personnel
expenditures -- testament to the GOR's continued difficulties in
reigning in public sector personnel costs despite the agreement with
the IMF.

4. (U) More spending and less revenue pushed the 2009 fiscal
deficit to more than four percent of GDP through August. To finance
this deficit, the Ministry of Finance (MOF) has sold more than 52
billion lei (about USD $17.7 billion) in T-bills through the first
of September, over four times the amount sold in the same period
last year. GOR interest payments on the public debt were up 55.5
percent in H1. Virtually all of the debt, with maturities of three
to six months at interest rates ranging from 10 to 12 percent, is
bought by commercial banks which currently prefer the safe haven of
GOR treasuries to riskier consumer and business lending. As a
result, IMF money deposited to the Central Bank (BNR) has had little
stimulative effect on the economy, since corresponding relaxation of
BNR compulsory reserves for banks has largely gone to finance the
deficit rather than being lent in the real economy. Many previously
profitable businesses have been left without stable access to
affordable credit.

5. (U) Amidst the gloom, economic analysts are cheered that the
recession has forced much-needed corrections in Romania's high
inflation and current account deficit (CAD). After approaching 14
percent of GDP in 2007 and still over 12 percent in 2008, the CAD
has dropped by 73.3 percent so far this year due to sharply lower
imports. This is faster than predicted, and analysts are optimistic
that the deficit will end 2009 at a much more sustainable 5-6
percent of GDP. At that level, foreign remittances and investment
inflows cover the entire CAD; in H1 Romania drew five billion euros
in FDI alone despite the recession. Inflation, which hit nearly 10
percent in 2008, will fall to around 4.5 percent by the end of 2009,
allowing BNR to continue a policy of gradual monetary easing.
Romania's high external imbalances helped precipitate the current
crisis; the economy will be better positioned to resume growth after
the steep correction this year.

6. (SBU) Comment. GOR and private sector analysts are cautiously
hopeful that the second and third quarters of 2009 mark the bottom
of Romania's recession. Negative GDP growth is still expected in
the fourth quarter, but at a reduced rate, followed by a return to
very modest positive growth in 2010. The strength of a recovery
will depend on how quickly demand picks up in major Western European
export markets, foreign investors return in substantial numbers, and
Romanian consumers start spending again. This, in turn, will be
influenced by how soon commercial banks get back to lending money.
Looming as a major question mark for the economy is the outcome of
the year-end presidential election, coupled with Romania's track
record over the next few months in doing the heavy political lifting
to implement major structural reforms under the IMF program.

BUCHAREST 00000642 002 OF 002


Investors will be watching closely. End comment.

8. (U) ROMANIA'S MACROECONOMIC SCORECARD

INDICATOR Jan-Jun 2008 Jan-Jun 2009 PERCENT CHANGE

INDUSTRIAL OUTPUT
VOLUME GROWTH RATE
AGAINST SAME PERIOD,
YEAR-EARLIER 6.1 -10.8

UNEMPLOYMENT RATE
END OF PERIOD (PCT) 3.8 6.0

INFLATION RATE (PCT)
CUMULATED FROM THE
BEGINNING OF THE
RESPECTIVE YEAR 3.6 3.1
REAL WAGE INDEX
END PERIOD TO
OCTOBER 1990 122.3 125.2

STATE BUDGET
DEFICIT
(MILLION USD) 3,048.4 4,905.4 +60.9

NOMINAL FOREX
RATE (LEI/USD)
(PCT) +6.1 -4.9
(LEI/EURO)
(PCT) -0.8 -5.5

FOREIGN TRADE
(MILLION USD)
EXPORTS (FOB) 25,627.5 17,795.5 -30.6
IMPORTS (CIF) 42,142.2 23,484.0 -44.3
DEFICIT (FOB/CIF)
(MILLION USD) 16,514.7 5,688.5 -65.6

CUMULATIVE FOREIGN
DIRECT INVESTMENT
STOCK AT THE END OF
THE PERIOD
(MILLION USD) 27,140.6 31,835.8 17.3

OFFICIAL FOREX RESERVES
END OF PERIOD*
(MILLION USD) 41,127.9 38,157.7 -7.2
*CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, INCLUDED.

GITENSTEIN

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