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Cablegate: Romanian Economy: Still No Recovery in the Third Quarter

VZCZCXRO6377
PP RUEHIK
DE RUEHBM #0833/01 3490829
ZNR UUUUU ZZH
P 150829Z DEC 09 ZDK
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 0162
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000833

SENSITIVE

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

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN IMF RO
SUBJECT: ROMANIAN ECONOMY: STILL NO RECOVERY IN THE THIRD QUARTER

BUCHAREST 00000833 001.2 OF 002

Sensitive but Unclassified; not for Internet distribution.

1. (SBU) Summary. While there are signs that this deep recession
may have finally hit bottom, the most recent statistics from the
Government of Romania (GOR) offer little hope of real recovery in
the near term. GDP figures for the first nine months of 2009,
released on December 3, show a 7.4 percent decline over the same
period in 2008. This is a slightly better performance than most
analysts had predicted; GDP in the first six months was off 7.6
percent compared to the year before, meaning that the rate of
contraction moderated between June and September. Industrial
output, services, and construction all contributed to the drop,
while agriculture reported better-than-expected results. The
consolidated budget deficit, which includes all central and local
government spending, remains a serious concern, but the external
deficit is now well within sustainable territory. End Summary.

2. (U) Compared to the 7.6 percent GDP contraction reported as of
the end of June, Romania's nine-month 7.4 percent downturn is less
bad than analysts expected - and therefore cause for cautious
optimism that the recession may have bottomed out in the third
quarter. Still, there is widespread sectoral weakness, meaning that
real recovery is still a ways off. The nine-month statistics show
construction down by 11.9 percent and services declining by 10.3
percent. Within the services sector, financial services held up
reasonably well, posting a decline of only 4.9 percent compared to
the first nine months of 2008. Despite initial worries a year ago
that the global financial contagion would wreak havoc in Romania's
banking sector, banks have ridden out the crisis with no failures
and have generally posted better-than-expected results.
Agriculture, with only a 1.2 percent decline, was the best performer
of the period. Fixed capital investments plunged 22.6 percent in
the current nine month period, while household consumption dropped
12.2 percent and overall consumption by 11.1 percent. Even if 4th
quarter 2009 GDP numbers end up showing modest improvement over the
3rd quarter, it will still undoubtedly be a decline against 4th
quarter 2008, meaning final numbers for 2009 will likely show at
least an eight percent year-on-year contraction.

3. (U) Declining GDP continues to pummel the GOR's balance sheet,
with net tax receipts down 14.9 percent over 2008 and total revenues
down 6.7 percent. The weight of GOR revenues in GDP thereby
decreased by 1.3 points to 23.3 percent. Among major revenue
sources, VAT collection declined by 19.1 percent, reflecting
decreasing retail sales and domestic demand. Profit tax collection
plunged 16.0 percent due to shrinking business activity, but higher
excise tax rates led to a 14.2 percent gain in this category. At
the same time that revenues declined, GOR spending rose 7.6 percent
against the first nine months of 2008, with total government
spending as a share of GDP reaching 28.4 percent. Capital
expenditures were down 4.9 percent but interest payments on
government bonds skyrocketed by 60.6 percent, reflecting more
expensive financing terms for the rising public sector debt.
Personnel expenditures continued to rise, up 9.2 percent, despite
GOR vows to bring state sector pay and bonuses under control.

4. (U) The revenue outlook remains grim, meaning that the new
government expected to be named after the presidential election
results are finalized will face unavoidable hard choices to remain
on track with Romania's IMF agreement. The consolidated budget
deficit jumped from 3.079 billion USD at the end of September 2008
(1.5 percent of GDP) to 8.180 billion USD (5.1 percent of GDP) at
the end of September 2009. The deficit should remain below 7.3
percent by the end of 2009 if Romania is to remain on track with its
IMF program, although the IMF has already signaled that it expects
the deficit to exceed this target by at least 0.5 percent. While
the last quarter of the year is traditionally characterized by GOR
spending binges, the lack of a fully functioning government and the
IMF spotlight may mitigate the tendency somewhat this time around.

5. (U) Romania's external imbalances, a major source of concern in
recent years, show dramatic improvement, though the collapse in
domestic production and consumption are largely responsible. The
nine-month current account deficit (CAD) totaled 4.506 billion USD,
down an impressive 77.3 percent compared to 2008. This was due to a
70.8 percent decline in the trade deficit, with imports falling much
faster than exports. The CAD is now at much more sustainable
levels, with foreign direct investment inflows alone exceeding the
deficit by 6.4 percent. Among other major indicators, the latest
annual inflation figure provided a negative surprise, ticking up to
4.65 percent in November after having fallen steadily throughout
2009. This was due primarily to higher energy prices and to
retailers passing higher excise tax rates on to consumers. A
reversal in the inflation trend, even if temporary, makes it harder
for the National Bank of Romania to continue with the process of

BUCHAREST 00000833 002.2 OF 002


monetary easing to help stimulate the economy.

6. (SBU) Comment. While the economy may have hit bottom in the 3rd
quarter, Romania is still in the midst of a severe recession and
faces a long road to dig itself out. The biggest challenges looming
for 2010 are to right-size the government bureaucracy and bring the
deficit under control as agreed with the IMF, without imperiling the
economic recovery. The GOR also needs to realign its spending
priorities away from current consumption and toward more investment
in the educational, social, and physical infrastructure needed to
sustain future growth. In a country where the public sector remains
too large and costly relative to the size of the economy, that is a
tall order. End Comment.

7. (U) ROMANIA'S MACROECONOMIC SCORECARD
-------------------------- --------------------------------
INDICATOR JAN-SEP 2008 JAN-SEP 2009 PERCENT
CHANGE
--------------------------- -------------------------------
INDUSTRIAL OUTPUT
VOLUME GROWTH INDEX
AGAINST SAME PERIOD,
YEAR-EARLIER 104.6 91.5

UNEMPLOYMENT RATE
END OF PERIOD (PCT) 3.9 6.9

INFLATION RATE (PCT)
CUMULATED FROM THE
BEGINNING OF THE
RESPECTIVE YEAR 4.6 3.3
REAL WAGE INDEX
END PERIOD TO
OCTOBER 1990 123.3 123.2

STATE BUDGET
DEFICIT
(MILLION USD) 3,516.4 8,177.6 132.5

NOMINAL FOREX
RATE (PCT)
(LEI/USD) -4.9 -0.7
(LEI/EUR) -3.0 -4.2

FOREIGN TRADE
(MILLION USD)
EXPORTS (FOB) 34,407.5 28,807.9 -16.3
IMPORTS (CIF) 56,568.0 38,236.5 -32.4
DEFICIT (FOB/CIF)
(MILLION USD) 22,160.5 9,428.6 -57.5

OFFICIAL FOREX RESERVES
END OF PERIOD*
(MILLION USD) 42,715.3 44,391.7 +3.9

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

GITENSTEIN

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