VZCZCXRO1157
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
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DE RUEHBM #0642/01 2650908
ZNR UUUUU ZZH
P 220908Z SEP 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9909
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000642 
 
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 IMF RO
SUBJECT: ROMANIA: ECONOMY STILL IN DEEP RECESSION 
 
REF: A) BUCHAREST 396 B) BUCHAREST 563 
 
Sensitive but Unclassified; not for Internet distribution. 
 
¶1.  (SBU) Summary.  Recent Government of Romania (GOR) statistics 
confirm that the economy remains in the grip of a deep recession. 
GDP contracted even faster in the second quarter (Q2) than in the 
first, with the cumulative slide for the first half (H1) of 2009 
reaching 7.6 percent.  The construction and services sectors were 
particularly hard hit.  Consumption dropped again in Q2 while the 
GOR's budget deficit grew dramatically.  One potential bright spot 
amid the gloom is the rapid downward adjustment in both the external 
deficit and inflation, setting the stage for renewed growth once 
demand picks back up in Romania's export markets.  End summary. 
 
¶2.  (U) After falling 6.2 percent in Q1 compared to the same period 
in 2008, Romania's GDP shrank at an accelerated rate of 8.7 percent 
in Q2 for an overall H1 decline of 7.6 percent.  Construction was 
down 11 percent in Q2, while trade, commerce, and financial services 
all declined in excess of four percent.  Manufacturing output posted 
a modest improvement over dismal Q1 numbers but was still down 7.3 
percent from Q2 2008 levels.  Any hopes for a quick recovery were 
further dimmed by a big 13.2 percent drop in household consumption 
compared to Q2 2008. 
 
¶3.  (SBU) The severity of the recession has left GOR finances in 
disarray.  Tax revenues are down substantially, led by a 15.7 
percent drop in VAT receipts (the GOR's single biggest source of 
income).  Corporate income tax receipts dropped eight percent and 
customs duties 37.4 percent due to the collapse in trade.  Property 
tax income actually rose 9.0 percent due to higher local tax rates 
but was not enough to offset other revenue shortfalls.  At the same 
time, overall government outlays rose 5.6 percent even as capital 
expenditures declined.  Higher spending on unemployment and other 
social benefits accounted for some of the increase, but the biggest 
contributor was a 12.0 percent jump in H1 government personnel 
expenditures -- testament to the GOR's continued difficulties in 
reigning in public sector personnel costs despite the agreement with 
the IMF. 
 
¶4.  (U) More spending and less revenue pushed the 2009 fiscal 
deficit to more than four percent of GDP through August.  To finance 
this deficit, the Ministry of Finance (MOF) has sold more than 52 
billion lei (about USD $17.7 billion) in T-bills through the first 
of September, over four times the amount sold in the same period 
last year.  GOR interest payments on the public debt were up 55.5 
percent in H1.  Virtually all of the debt, with maturities of three 
to six months at interest rates ranging from 10 to 12 percent, is 
bought by commercial banks which currently prefer the safe haven of 
GOR treasuries to riskier consumer and business lending.  As a 
result, IMF money deposited to the Central Bank (BNR) has had little 
stimulative effect on the economy, since corresponding relaxation of 
BNR compulsory reserves for banks has largely gone to finance the 
deficit rather than being lent in the real economy.  Many previously 
profitable businesses have been left without stable access to 
affordable credit. 
 
¶5.  (U) Amidst the gloom, economic analysts are cheered that the 
recession has forced much-needed corrections in Romania's high 
inflation and current account deficit (CAD).  After approaching 14 
percent of GDP in 2007 and still over 12 percent in 2008, the CAD 
has dropped by 73.3 percent so far this year due to sharply lower 
imports.  This is faster than predicted, and analysts are optimistic 
that the deficit will end 2009 at a much more sustainable 5-6 
percent of GDP.  At that level, foreign remittances and investment 
inflows cover the entire CAD; in H1 Romania drew five billion euros 
in FDI alone despite the recession.  Inflation, which hit nearly 10 
percent in 2008, will fall to around 4.5 percent by the end of 2009, 
allowing BNR to continue a policy of gradual monetary easing. 
Romania's high external imbalances helped precipitate the current 
crisis; the economy will be better positioned to resume growth after 
the steep correction this year. 
 
¶6.  (SBU) Comment.  GOR and private sector analysts are cautiously 
hopeful that the second and third quarters of 2009 mark the bottom 
of Romania's recession.  Negative GDP growth is still expected in 
the fourth quarter, but at a reduced rate, followed by a return to 
very modest positive growth in 2010.  The strength of a recovery 
will depend on how quickly demand picks up in major Western European 
export markets, foreign investors return in substantial numbers, and 
Romanian consumers start spending again.  This, in turn, will be 
influenced by how soon commercial banks get back to lending money. 
Looming as a major question mark for the economy is the outcome of 
the year-end presidential election, coupled with Romania's track 
record over the next few months in doing the heavy political lifting 
to implement major structural reforms under the IMF program. 
 
BUCHAREST 00000642  002 OF 002 
 
 
Investors will be watching closely.  End comment. 
 
¶8.  (U) ROMANIA'S MACROECONOMIC SCORECARD 
 
INDICATOR         Jan-Jun 2008   Jan-Jun 2009 PERCENT CHANGE 
 
INDUSTRIAL OUTPUT 
VOLUME GROWTH RATE 
AGAINST SAME PERIOD, 
YEAR-EARLIER                6.1          -10.8 
 
UNEMPLOYMENT RATE 
END OF PERIOD (PCT)         3.8            6.0 
 
INFLATION RATE (PCT) 
CUMULATED FROM THE 
BEGINNING OF THE 
RESPECTIVE YEAR             3.6            3.1 
REAL WAGE INDEX 
END PERIOD TO 
OCTOBER 1990               122.3          125.2 
 
STATE BUDGET 
DEFICIT 
(MILLION USD)            3,048.4        4,905.4        +60.9 
 
NOMINAL FOREX 
RATE (LEI/USD) 
(PCT)                      +6.1           -4.9 
(LEI/EURO) 
(PCT)                      -0.8           -5.5 
 
FOREIGN TRADE 
(MILLION USD) 
EXPORTS (FOB)          25,627.5       17,795.5        -30.6 
IMPORTS (CIF)          42,142.2       23,484.0        -44.3 
DEFICIT (FOB/CIF) 
(MILLION USD)          16,514.7        5,688.5        -65.6 
 
CUMULATIVE FOREIGN 
DIRECT INVESTMENT 
STOCK AT THE END OF 
THE PERIOD 
(MILLION USD)          27,140.6       31,835.8        17.3 
 
OFFICIAL FOREX RESERVES 
END OF PERIOD* 
(MILLION USD)          41,127.9       38,157.7        -7.2 
*CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, INCLUDED. 
 
GITENSTEIN