VZCZCXRO8614
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBM #0396/01 1660917
ZNR UUUUU ZZH
P 150917Z JUN 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9597
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000396 
 
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 RO
SUBJECT: ROMANIA: SHARP Q1 2009 CONTRACTION AFTER TEN BOOMING YEARS 
 
Sensitive but Unclassified; Not for Internet Distribution. 
 
¶1.  (U) Summary.  Romania's economy posted a steep and widely 
anticipated drop in GDP growth in the first quarter (Q1) of 2009 
according to official statistics released on June 9th by the 
National Statistics Institute (INS).  The economy showed a 6.2 
percent decline overall against the first quarter of 2008.  The pain 
was widely felt throughout the economy, with nearly all sectors 
contracting.  On a positive note, sharply lower imports helped bring 
down the current account deficit (CAD) to more manageable levels. 
After peaking at 14 percent of GDP in 2007, the CAD fell abruptly on 
an annualized basis to seven percent of GDP in Q1 2009.  End 
summary. 
 
 
¶2.  (U) Romania's 6.2 percent contraction in Q1 2009 represented a 
continuation of the dramatic slowdown which began in the final 
quarter of 2008.  Official unemployment, while still relatively low 
at 5.6 percent, has been on an upward trend due to incipient 
weakness in the service and other sectors.  (Note:  Official 
employment figures don't capture the full picture in the labor 
market, as underemployment remains a widespread problem and black 
market activity, according to some analysts, may account for as much 
as a third of GDP.  End note.)  A weakening leu counteracted 
gradually slowing consumer demand (down 0.5 percent since Q4 2008) 
to keep inflation at a steady annualized rate of 5.4 percent.  The 
Government of Romania (GOR) posted a consolidated budget deficit of 
1.5 percent of GDP in Q1, bucking the trend of previous fiscal years 
of remaining in surplus until the last quarter. 
 
¶3.  (U) The hardest hit sector in Q1 was agriculture, forestry and 
fisheries, declining by 7.6 percent since Q4 2008 and 10.9 percent 
compared to Q1 2008.  While the impact of this decline was 
relatively modest given the low weight in the GDP (6.4 percent), 
underinvestment in agriculture continues to act as a brake on 
Romania's potential.  Despite fertile cropland, the on-going failure 
to consolidate and adopt modern farming methods has kept Romania 
(where nearly 30 percent of the population is engaged in 
agriculture) a net food importer.  Manufacturing, which accounts for 
24.4 percent of GDP, responded to weaker demand in export markets by 
posting a modest 1.4 percent decline from Q4 2008 (when the drop was 
much steeper), but equaling a huge 11.1 percent slowdown compared 
with Q1 2008.  Retail, hotels, restaurants, transportation, and 
communications dropped 7.5 percent from Q1 2008 and 3.7 percent 
against the last quarter of 2008.  Financial services were down 3.8 
percent against Q1 2008, but recovered slightly against the very 
poor Q4 2008 performance.  Government and other services grew by 3.1 
percent from the same quarter 2008 and 0.1 percent from the last 
quarter, 2008, reflecting continued GOR deficit spending in a bid to 
shore up the economy.  While construction was up 4.7 percent against 
Q1 2008, this reflects the tail-end of Romania's construction boom 
which steadily accelerated through Q3 2008 only to taper off quickly 
at year's end.  The overall trend is negative, with the sector 
declining by 0.3 percent when compared with Q4 2008. 
 
¶4.  (U) Government revenues declined in lockstep with the economy, 
with net tax revenues falling by 9.4 percent against Q1 2008. 
Household consumption fell by 12.3 percent and total final 
consumption was lower by 9.1 percent.  Fixed capital formation 
(investments) slightly decreased from Q1 2008, down 0.3 percent. 
The drop, however, is a much more significant 7.1 percent if 
compared to Q4 2008.  This was caused in part by the late approval 
of the annual budget, the slowing the pace of public sector 
investments, as well as by an overall reduction in the availability 
of credit. 
 
 
¶5.  (U) The Q1 2009 CAD amounted to the equivalent of USD 921.7 
million, down 84.4 percent in USD from the same period, year before. 
 Unfortunately for Romania, this positive adjustment only happened 
because imports fell precipitously, and at a faster rate than 
exports.  Still, some foreign direct investment flows have continued 
to come in, fully covering the CAD in Q1.  This represents a marked 
improvement to the 42.8 percent coverage in Q1 2008.  A lingering 
appetite for imported goods and a weakened currency accounted for 
much of the deficit, although the trade deficit did decline by 71.4 
percent overall.  Lower credit and decelerating demand will likely 
lead to another decline in the second quarter deficit.  On a less 
positive note, the surplus in current transfers fell 16 percent from 
the same period in 2008 due to international labor market problems. 
Remittance income has provided a major prop to domestic consumption 
and functioned as a sort of social safety net for rural areas, 
making any sustained reduction worrisome. 
 
¶6. (SBU) Comment.  After years of sustained high growth, Romania's 
economy has fallen abruptly into a painful recession.  The lower 
 
BUCHAREST 00000396  002 OF 002 
 
 
availability of credit, a weakening currency, and shrinking 
consumption make the odds for a sharp revival in the second half of 
the year remote.  The best hope is that the biggest decline has 
already happened, and the downward trend will moderate and then 
stabilize in the second half of 2009.  The injection of IMF funds 
should ease the strains in the financial sector, but the IMF program 
also constrains the GOR's ability to boost stimulus spending.  With 
no strong growth drivers on the horizon, the outlook is cloudy.  The 
downturn has shown that Romania is more integrated into the EU and 
the broader world economy than would appear at first blush, given 
the large share of domestic production and consumption in GDP.  A 
weak export market, extremely tight bank lending, and a modest 
decline in remittances have all contributed to current weakness.  As 
such, it will probably take a resumption of domestic credit growth, 
renewed investment flows, and a demand revival in Romania's main 
export markets to restart the growth engine here.  Prospects for a 
recovery in 2009 appear remote.  End comment. 
 
 
¶7. (U) ROMANIA'S MACROECONOMIC SCORECARD 
 
INDICATOR         Jan-Mar 2008   Jan-Mar 2009 PERCENT CHANGE 
 
INDUSTRIAL OUTPUT 
VOLUME GROWTH RATE 
AGAINST SAME PERIOD, 
YEAR-EARLIER                5.4          -11.1 
 
UNEMPLOYMENT RATE 
END OF PERIOD (PCT)         4.2            5.6 
 
INFLATION RATE (PCT) 
CUMULATED FROM THE 
BEGINNING OF THE 
RESPECTIVE YEAR        2.2             2.6 
 
REAL WAGE INDEX 
END PERIOD TO 
OCTOBER 1990             116.0           127.9 
 
STATE BUDGET 
DEFICIT 
(MILLION USD)         1,689.8         3,069.0     +81.6 
 
NOMINAL FOREX 
RATE (LEI/USD) 
(PCT)                     +4.1           -12.3 
(LEI/EURO) 
(PCT)                     -3.0            -6.3 
 
FOREIGN TRADE 
(MILLION USD) 
EXPORTS (FOB)        11,868.4         8,529.3      -28.1 
IMPORTS (CIF)        19,094.2        11,123.7      -41.7 
DEFICIT (FOB/CIF) 
(MILLION USD)     7,225.8         2,594.4      -64.1 
 
CUMULATIVE FOREIGN 
DIRECT INVESTMENT 
STOCK AT THE END OF 
THE PERIOD 
(MILLION USD)         25,233.2        30,612.7       21.3 
 
OFFICIAL FOREX RESERVES 
END OF PERIOD* 
(MILLION USD)        40,429.2        36,202.3      -10.5 
*CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, INCLUDED. 
 
GUTHRIE-CORN