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. 
 
GUTHRIE-CORN