VZCZCXRO0124
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0739/01 2660925
ZNR UUUUU ZZH
P 220925Z SEP 08 ZDK ALL CTG NUM SVCS
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 8715
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 BUCHAREST 000739 
 
STATE FOR EUR/CE: ASCHIEBE AND EEB/IFD 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EIND EFIN RO
SUBJECT: ROMANIA: STRONG GROWTH CONTINUES, BUT AT AN INFLATIONARY 
COST 
 
BUCHAREST 00000739  001.4 OF 002 
 
 
Sensitive but Unclassified, Not for Internet Distribution. 
 
¶1.  (U) Summary.  Romania's economy posted higher-than-expected 
growth in the first half of 2008, prompting renewed worries of 
over-heating in the near future.  The construction, services, 
industrial and retail sectors drove the growth rate to 8.8% over the 
same period last year.  However, the impressive growth was 
accompanied by surging inflation, which at an annualized rate in 
June of 8.6% is still well above the Central Bank's target.  This 
has prompted the Central Bank to continue its policy of monetary 
tightening.  End summary. 
 
 
¶2.  (U) Romania's real GDP growth rate accelerated during the second 
quarter of the year to 9.3%, on top of 8.2% in the first quarter, 
reaching an average 8.8% growth rate over the first half (H1) of 
¶2008.  This was the best H1 growth performance in 18 years.  The 
growth was driven by a surge in construction, up a staggering 33.3% 
over the same period in 2007; services, up 7.6%; followed by 
industry, up 5.8%.  Agriculture improved from last year's 
disappointing season, when the severe drought impacted growth; H1 
production this year rose by 2.6% despite floods in some parts of 
the country.  Overall, services have risen to account for nearly 
half (49.5%) of GDP, while manufacturing accounts for 26.5%, 
construction 8.1%, and agriculture 3.6%.  Statistics show robust 
economic expansion across the board, with household consumption 
increasing 11% compared to the same period in 2007.  The growth in 
the formation of fixed capital was 7.8%.  In nominal terms, 
Romania's H1 2008 GDP amounted to the equivalent of USD 81.9 
billion. 
 
¶3.  (U) This strong growth trend has, not surprisingly, been 
accompanied by rapidly rising prices.  Given the June-thru-June 
annualized 8.6% inflation rate, analysts now expect a final 2008 
annual rate of between 7.5% and 8%.  This would be more than double 
the Central Bank's target of 3.8% plus or minus 1% and a 
substantially worse performance than the 2007 rate of 6.6%.  In H1, 
service sector inflation posted the highest increase at 3.78%, 
chiefly due to rising public utility costs.  Food prices followed 
closely behind, up 3.68%.  Only non-food items were below the 
average, up 3.37%.  Despite several consecutive hikes of the 
benchmark interest rate, and high minimum reserve requirements, the 
Central Bank has not yet succeeded in taming inflation.  Main 
factors in the inflation surge were higher international fuel 
prices, which have had a direct impact on transportation costs; 
persistent consumer demand, due to rising incomes; and residual 
tensions in the agricultural market as a result of several years of 
poor yields.  Because one factor keeping inflation from rising even 
faster has been the leu's previous appreciation against the euro, 
worries remain with regard to the future forex rate trend. The 
practice of denominating (and borrowing for) big ticket purchases in 
euros could drive further inflation if the leu were to markedly 
depreciate and the price of these goods were to rise commensurately. 
 
 
¶4.  (U) Despite higher-than expected inflation in the first half of 
2008, initial reports for July and August indicate that a slight 
deceleration may have begun.  Prices actually declined in August by 
0.09%, prompting the August-thru-August annualized inflation rate to 
drop to 8.0%.  Still, the main challenges for controlling inflation 
in the second half of the year will include real salary gains 
compared to labor productivity, expected growth in public sector 
spending during the election cycle, uncertainties related to 
international fuel prices, and the upward trend in 
government-controlled prices (i.e. utilities, transport, and social 
insurance expenditures).  Robust economic growth and labor 
emigration continue to push domestic incomes higher, which in turn 
should continue to support retail consumption at today's high 
levels.  However, unpredictable fuel prices will likely have the 
most pronounced effect on the final inflation rate for 2008. 
 
¶5. (SBU) Comment. Despite the high inflation headlines and, in some 
respects, the appearance of a bubble economy, the underlying 
economic trends appear to be setting Romania up for a slowdown, 
rather than a spectacular crash.  The high growth in the first half 
of 2008 revived old worries of a "hard landing" for the Romanian 
economy.  However, post believes a more likely scenario is a modest 
slowdown in growth from the currently unsustainable 8.8% to around 
5-6% in 2009.  Inflation appears to have already slowed somewhat in 
July and August, while Romanian exports have been growing at higher 
rates than imports.  Moreover, foreign investors' appetite for 
exposure to the Romanian economy remains steady, with an increasing 
share of the current account deficit being financed by foreign 
direct investment despite world financial market turmoil. 
Additionally, reports of layoffs, especially in the construction 
sector, in the weakening economies of Western Europe may evenually 
offer some wage relief in Romania.  Large numbers of Romanian 
 
BUCHAREST 00000739  002.2 OF 002 
 
 
expatriates are employed in Spain and Italy, and if deteriorating 
conditions there prompt even some of these workers to return home, 
this would help to further moderate wage inflation.  It would also 
assist in keeping foreign investors, who are on the lookout for 
investment opportunities far away from Wall Street's financial 
turmoil, interested in Romania.  End Comment. 
 
Taubman