VZCZCXRO6377
PP RUEHIK
DE RUEHBM #0833/01 3490829
ZNR UUUUU ZZH
P 150829Z DEC 09 ZDK
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 0162
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000833 
 
SENSITIVE 
 
STATE FOR EUR/CE ASCHIEBE AND EEB/IFD 
TREASURY FOR JBAKER 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EIND EFIN IMF RO
SUBJECT: ROMANIAN ECONOMY: STILL NO RECOVERY IN THE THIRD QUARTER 
 
BUCHAREST 00000833  001.2 OF 002 
 
 
 
Sensitive but Unclassified; not for Internet distribution. 
 
¶1.  (SBU) Summary.  While there are signs that this deep recession 
may have finally hit bottom, the most recent statistics from the 
Government of Romania (GOR) offer little hope of real recovery in 
the near term.  GDP figures for the first nine months of 2009, 
released on December 3, show a 7.4 percent decline over the same 
period in 2008.  This is a slightly better performance than most 
analysts had predicted; GDP in the first six months was off 7.6 
percent compared to the year before, meaning that the rate of 
contraction moderated between June and September.  Industrial 
output, services, and construction all contributed to the drop, 
while agriculture reported better-than-expected results.  The 
consolidated budget deficit, which includes all central and local 
government spending, remains a serious concern, but the external 
deficit is now well within sustainable territory.  End Summary. 
 
¶2.  (U) Compared to the 7.6 percent GDP contraction reported as of 
the end of June, Romania's nine-month 7.4 percent downturn is less 
bad than analysts expected - and therefore cause for cautious 
optimism that the recession may have bottomed out in the third 
quarter.  Still, there is widespread sectoral weakness, meaning that 
real recovery is still a ways off.  The nine-month statistics show 
construction down by 11.9 percent and services declining by 10.3 
percent.  Within the services sector, financial services held up 
reasonably well, posting a decline of only 4.9 percent compared to 
the first nine months of 2008.  Despite initial worries a year ago 
that the global financial contagion would wreak havoc in Romania's 
banking sector, banks have ridden out the crisis with no failures 
and have generally posted better-than-expected results. 
Agriculture, with only a 1.2 percent decline, was the best performer 
of the period.  Fixed capital investments plunged 22.6 percent in 
the current nine month period, while household consumption dropped 
12.2 percent and overall consumption by 11.1 percent.  Even if 4th 
quarter 2009 GDP numbers end up showing modest improvement over the 
3rd quarter, it will still undoubtedly be a decline against 4th 
quarter 2008, meaning final numbers for 2009 will likely show at 
least an eight percent year-on-year contraction. 
 
¶3.  (U) Declining GDP continues to pummel the GOR's balance sheet, 
with net tax receipts down 14.9 percent over 2008 and total revenues 
down 6.7 percent.  The weight of GOR revenues in GDP thereby 
decreased by 1.3 points to 23.3 percent.  Among major revenue 
sources, VAT collection declined by 19.1 percent, reflecting 
decreasing retail sales and domestic demand.  Profit tax collection 
plunged 16.0 percent due to shrinking business activity, but higher 
excise tax rates led to a 14.2 percent gain in this category.  At 
the same time that revenues declined, GOR spending rose 7.6 percent 
against the first nine months of 2008, with total government 
spending as a share of GDP reaching 28.4 percent.  Capital 
expenditures were down 4.9 percent but interest payments on 
government bonds skyrocketed by 60.6 percent, reflecting more 
expensive financing terms for the rising public sector debt. 
Personnel expenditures continued to rise, up 9.2 percent, despite 
GOR vows to bring state sector pay and bonuses under control. 
 
¶4.  (U) The revenue outlook remains grim, meaning that the new 
government expected to be named after the presidential election 
results are finalized will face unavoidable hard choices to remain 
on track with Romania's IMF agreement.  The consolidated budget 
deficit jumped from 3.079 billion USD at the end of September 2008 
(1.5 percent of GDP) to 8.180 billion USD (5.1 percent of GDP) at 
the end of September 2009.  The deficit should remain below 7.3 
percent by the end of 2009 if Romania is to remain on track with its 
IMF program, although the IMF has already signaled that it expects 
the deficit to exceed this target by at least 0.5 percent.  While 
the last quarter of the year is traditionally characterized by GOR 
spending binges, the lack of a fully functioning government and the 
IMF spotlight may mitigate the tendency somewhat this time around. 
 
¶5.  (U) Romania's external imbalances, a major source of concern in 
recent years, show dramatic improvement, though the collapse in 
domestic production and consumption are largely responsible.  The 
nine-month current account deficit (CAD) totaled 4.506 billion USD, 
down an impressive 77.3 percent compared to 2008.  This was due to a 
70.8 percent decline in the trade deficit, with imports falling much 
faster than exports.  The CAD is now at much more sustainable 
levels, with foreign direct investment inflows alone exceeding the 
deficit by 6.4 percent.  Among other major indicators, the latest 
annual inflation figure provided a negative surprise, ticking up to 
4.65 percent in November after having fallen steadily throughout 
¶2009.  This was due primarily to higher energy prices and to 
retailers passing higher excise tax rates on to consumers.  A 
reversal in the inflation trend, even if temporary, makes it harder 
for the National Bank of Romania to continue with the process of 
 
BUCHAREST 00000833  002.2 OF 002 
 
 
monetary easing to help stimulate the economy. 
 
¶6.  (SBU) Comment.  While the economy may have hit bottom in the 3rd 
quarter, Romania is still in the midst of a severe recession and 
faces a long road to dig itself out.  The biggest challenges looming 
for 2010 are to right-size the government bureaucracy and bring the 
deficit under control as agreed with the IMF, without imperiling the 
economic recovery.  The GOR also needs to realign its spending 
priorities away from current consumption and toward more investment 
in the educational, social, and physical infrastructure needed to 
sustain future growth.  In a country where the public sector remains 
too large and costly relative to the size of the economy, that is a 
tall order.  End Comment. 
 
¶7.  (U) ROMANIA'S MACROECONOMIC SCORECARD 
-------------------------- -------------------------------- 
INDICATOR        JAN-SEP 2008   JAN-SEP 2009    PERCENT 
                                                   CHANGE 
--------------------------- ------------------------------- 
INDUSTRIAL OUTPUT 
VOLUME GROWTH INDEX 
AGAINST SAME PERIOD, 
YEAR-EARLIER              104.6         91.5 
 
UNEMPLOYMENT RATE 
END OF PERIOD (PCT)         3.9          6.9 
 
INFLATION RATE (PCT) 
CUMULATED FROM THE 
BEGINNING OF THE 
RESPECTIVE YEAR             4.6          3.3 
REAL WAGE INDEX 
END PERIOD TO 
OCTOBER 1990              123.3        123.2 
 
STATE BUDGET 
DEFICIT 
(MILLION USD)          3,516.4      8,177.6        132.5 
 
NOMINAL FOREX 
RATE (PCT) 
(LEI/USD)                  -4.9         -0.7 
(LEI/EUR)                  -3.0         -4.2 
 
FOREIGN TRADE 
(MILLION USD) 
EXPORTS (FOB)          34,407.5     28,807.9        -16.3 
IMPORTS (CIF)         56,568.0     38,236.5        -32.4 
DEFICIT (FOB/CIF) 
(MILLION USD)     22,160.5      9,428.6        -57.5 
 
OFFICIAL FOREX RESERVES 
END OF PERIOD* 
(MILLION USD)         42,715.3     44,391.7         +3.9 
 
*CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, INCLUDED. 
 
GITENSTEIN