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