US embassy cable - 05BUCHAREST721

UNCLAS SECTION 01 OF 04 BUCHAREST 000721 
 
SIPDIS 
 
STATE FOR EUR/NCE - WSILKWORTH, EB/IFD 
STATE PASS USTR 
USTR FOR LERRION 
TREASURY FOR STUART 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL 
STATE PASS USAID 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EIND, EFIN, RO 
SUBJECT: ROMANIAN ECONOMY APPEARS ON GOOD TRAJECTORY 
 
 
1. Summary: Romania made impressive economic progress in 
2004, demonstrating strong GDP growth, curbing inflation and 
lowering unemployment.  On the negative side, strong 
consumer demand fueled a growing current account deficit as 
Romania's trade deficit rose due to surging imports.  The 
country appears to have put itself firmly in a growth mode, 
but it must watch carefully its current account deficit.  A 
strengthening currency will help in meeting inflation 
targets.  End Summary. 
 
A Good Year 
----------- 
2. Romania posted a post-communist record 8.3 percent 
economic growth in 2004 with total GDP of $73.2 billion, in 
excess of $70 billion for the first time.  An excellent 
agricultural harvest and a construction boom were the main 
engines of this growth.  Industrial output increased largely 
due to expansion in the processing sectors.  Inflation 
dropped from 14.1 percent in 2003 to 9.3 percent last year - 
the first single-digit annual inflation rate posted since 
1989.  Official foreign exchange (forex) reserves reached 
record highs at the end of 2004, representing 5.2 import 
months, up from 4.1 months at the end of 2003.  (See 
paragraph 17 for statistical scorecard). 
 
Consumer Demand Assists GDP Growth 
---------------------------------- 
3.  Growth in the agricultural sector, up 22.2 percent, and 
construction, up 9.0 percent, were the largest contributors 
to strong GDP in 2004.  Industrial output increased 5.3 
percent; industries showing significant growth included 
manufacturing, wood processing, chemicals, transportation, 
electric equipment, and construction materials.  Lower 
outputs were posted in the medical, precision and optical 
equipment, as well as food and beverage industries.  The 
mining output rose 2.4 percent, while energy output dropped 
3.2 percent against 2003.  Extremely favorable crop 
conditions resulted in the 22 percent growth in the 
agricultural sector.  However, in the absence of a viable 
irrigation system, this stellar agricultural performance is 
not sustainable for the long term. 
 
4.  Final consumption rose 10.3 percent and investments grew 
faster than the overall GDP.  However, investment as a share 
of GDP still is low at 25 percent. 
 
Record Trade Deficits 
--------------------- 
5.  Romanian exports posted record levels, up 33.8 percent 
in USD and 21.3 percent in Euro, in comparison with 2003. 
For the first time Romanian exports exceeded $20 billion. 
This export performance is all the more striking, given that 
the Romanian Leu (ROL) appreciated both against the USD - by 
10.8 percent, and the Euro - by 3.5 percent.  This 
appreciation hindered Romanian exports while assisting 
importers.  Italy, Germany, France, Turkey and the U.K. have 
remained the primary markets for Romanian exports.  Romanian 
exports to the EU rose 7.2 percent last year.  The EU's 
enlarged market accounted for 72.9 percent of Romanian total 
exports, up from the 67.7 percent in 2003.  Romanian exports 
to the U.S. reached $668.5 million, up 7.3 percent, and 
comprised 2.8 percent of total Romanian exports, in 
comparison with 3.5 percent in 2003. 
 
6.  Textiles and apparel topped the list of Romanian 
exports, at 22.3 percent, increasing 17 percent to $5.2 
billion.  However, textile exports are on a clear downward 
trend.  Their weight has decreased from one third of total 
exports in 2002 to 25.4 percent in 2003, as local wages have 
moved upward, resulting in less attractive finished product 
costs.   Machinery and equipment, 17.6 percent of total 
exports, soared 45.6 percent, and metal products, 15.4 
percent of total exports, increased an impressive 62.9 
percent.  Romanian exporters fear that 2005 may witness a 
halt of export growth, due to ROL appreciation and the 
redirection of company resources as production facilities 
are upgraded to bring goods up to EU standards. 
 
7.  While Romanian exports exceeded $20 billion in 2004, 
Romanian imports broke the $30 billion record.  Imports were 
driven mainly by a relative absence of domestic supply that, 
along with more favorable financing terms, boosted non- 
government credit by 38 percent.  Machinery and equipment 
topped Romanian imports with a 23.8 percent share of 
imports, representing a 35.0 percent increase over 2003. 
This trend was fueled by the Romanian corporate sector's 
appetite for modern technologies and pent-up durable goods 
demand.  Textiles, minerals, transportation and chemicals 
were also top imports.  Due to attractive prices and an 
increasingly wide range of choices, motor-vehicle imports 
saw the most spectacular increase - 103.2 percent compared 
with 2003.  Romanian imports continued to arrive primarily 
from Italy, Germany, France and Russia.  The percentage of 
suppliers from the now enlarged European Union was 64.9, 
compared with 57.7 percent in 2003.  Significantly, U.S. 
exports to Romania surged to $933 million, up 67.1 percent 
from 2003.  These U.S. goods comprised 2.9 percent of total 
Romanian imports, up from 2.3 percent at the end of 2003. 
 
8.  The 2004 current account deficit of $5.458 billion  rose 
57.8 percent in USD, or 43.8 percent in Euros, against 2003. 
This was largely driven by the strong increase in the goods 
and services deficit, up 56 percent in USD terms, and, 
income deficit, up 25.2 percent in USD.  The increase in the 
current transfers surplus, up 35.1 percent, could not offset 
the deficit surge.  Aside from the goods trade deficit, the 
main drivers of the worsening current account deficit were a 
23.6 percent drop in the international transportation 
surplus and 13.8 percent deterioration of the international 
tourism deficit.  The International Monetary Fund (IMF) 
views the current account deficit of nearly 7.5 percent of 
GDP as a matter of concern.  The increasing 2004 foreign 
direct investment comprised approximately 39.5 percent of 
the current account deficit. This amount, however, is 
relatively small when compared to current transfers that 
covered about 56.7 percent of the current account deficit. 
 
Single-Digit Inflation at Last: Can it last? 
-------------------------------------------- 
9.  For the first time in 15 years, Romania succeeded in 
posting annual inflation below ten percent, to 9.3.  The 
GOR's nine percent target rate was only slightly exceeded by 
0.3 percent.  Price increases in non-food goods drove 
inflation.  The 2003 monthly average retail inflation rate 
was 0.7 percent, compared to 1.1 percent in 2003.  The ROL's 
appreciation, a good agricultural year, and the former GOR's 
reluctance to adjust public utility prices on the eve of 
general elections offset increasing international crude 
prices. 
 
10.  The official unemployment rate dropped to 6.2 percent 
in December 2004, down from 7.4 percent a year earlier. 
This was primarily due to expansion in the manufacturing, 
construction, agriculture, and retail industries.  Also, 
continuing significant labor migration abroad represented 
another major factor in maintaining the lower local 
unemployment rate. 
 
Tight Budget Execution 
---------------------- 
11. Improved revenue collection and tighter controls on 
spending caused Romania's consolidated budget deficit to 
fall to $834.5 million, representing 1.2 percent of GDP, 
lower than both the 2003 2.4 percent deficit and the 1.64 
percent annual target.  Consolidated budget revenues 
amounted to $21.7 billion, up 25.4 percent when compared 
with 2003, whereas consolidated budget expenditures amounted 
to $22.5 million, up 22.3 percent from last year.  Local 
governments' 2004 surpluses amounted to a total of $117.9 
million, against a 2003 deficit in the amount of $4.3 
million.  However, the 2004 social assistance budget 
deteriorated to a $4.2 million deficit, from a previous 2003 
surplus of $53.3 million.  Increasing revenues due to 
economic growth, higher sales and excise collections, more 
focus on tax collection, and tighter spending monitoring 
under the IMF's microscope resulted in a lower 2004 
consolidated budget deficit. 
 
Foreign Investments Inching Up 
------------------------------ 
12.  The net stock of foreign direct investment (FDI) 
between 1990 and 2004 amounted to slightly over $13.57 
billion, up 30.9 percent from 2003.  Leading country 
investors were the Netherlands (with 15.5 percent of the 
total investment since 1990), Austria (12.2 percent), France 
(11.1 percent), Germany (8.0 percent), the U.S. (6.5 
percent), and Italy (5.2 percent).  Nonetheless, Romania's 
foreign direct investment per capita of merely $148.5 
demonstrates that Romania has not yet become a favored 
destination for foreign investors.  U.S. investment in 2004 
rose 26.1 percent to $888.4 million, although the percentage 
weight shrank from 6.8 to 6.5 and the U.S.'s rank fell from 
fourth to fifth place, due to Austrian petroleum company 
OMV's purchase of the national oil company Petrom. 
 
13.  At the end of December 2004, total foreign portfolio 
inflows jumped 47.0 percent reaching $249.5 million; 
outflows rose 65.5 percent to $165.5 million.  During 2004, 
total purchases performed by foreign investors on the 
Romanian capital markets soared 68.8 percent to $321.1 
million, while their total local sales jumped 71.5 percent 
to $209.8 million.  The trend was positive, encouraged by 
the increasing potential of this emerging capital market. 
 
Privatization Continues 
----------------------- 
14.  In 2004, the State Asset Resolution Authority (AVAS) 
sold 62 medium and large companies in which the state was a 
majority shareholder.  In addition to these transactions, 
AVAS privatized minority stakes in 85 companies, resulting 
of total revenues to AVAS in the amount of $381.2 million. 
The largest single privatization that occurred in Romania 
last year was the Ministry of Economy and Trade's sale of 
the national oil company, PETROM, to Austria's OMV, for 
about 680 million euros. Approximately another 830 million 
euros was pledged for capital investment. 
 
A Capital Market Ready to Take Off? 
----------------------------------- 
15.  Throughout 2004, Romania's capital markets displayed 
increasing dynamism.  The number of shares traded increased 
2.85 times and overall market capitalization doubled in USD 
terms reaching $12.9 billion by the year's end.   Average 
daily turnover jumped to $3.7 million, a substantial 
increase from 2003's $1.2 million.  Declining interest rates 
increased investor appetite for stock market plays, while 
the number of listed securities continued to grow and 
diversify.  Banking and oil stocks saw the highest trading 
volumes.  Bucharest's two stock exchanges are scheduled to 
merge in 2005, subsequent to the Bucharest Stock Exchange's 
expected incorporation.  Trading volume is likely to 
steadily increase in 2005 as initial public offerings of 
stock and bonds in a wide range of industries are expected 
to occur, including public utilities. 
 
Comment 
------- 
16.  Slashing inflation was the GOR's greatest macroeconomic 
achievement in 2004; whether this downward trend will 
continue in the face of increasing pressures remains to be 
seen.  The IMF's recommended public utility tariff increases 
will, however, add to the price level.  Working in favor of 
contained or even lower inflation will be the Central Bank's 
policy of allowing the forex market to adjust the price of 
the ROL upward against the dollar and Euro. 
 
17.  ROMANIA'S MACROECONOMIC SCORECARD 
--------------------------------------------- -------------- 
INDICATOR                 2003        2004   PERCENT CHANGE 
--------------------------------------------- -------------- 
INDUSTRIAL OUTPUT 
VOLUME GROWTH RATE 
AGAINST SAME PERIOD, 
YEAR-EARLIER               3.4          5.3 
 
UNEMPLOYMENT RATE 
END OF PERIOD (PCT)        7.4          6.2 
 
INFLATION RATE (PCT) 
CUMULATED FROM THE 
BEGINNING OF THE 
RESPECTIVE YEAR           14.1          9.3 
 
REAL WAGE INDEX 
END PERIOD TO 
OCTOBER 1990              74.7         83.1 
 
STATE BUDGET 
DEFICIT 
(MILLION USD)            873.6        575.5     -34.1 
 
NOMINAL FOREX 
RATE (LEI/USD) 
(PCT)                     +2.7        +10.8 
 
FOREIGN TRADE 
(MILLION USD) 
EXPORTS (FOB)         17,618.0     23,479.0     +33.3 
IMPORTS (CIF)         24,003.1     32,588.4     +35.8 
DEFICIT (FOB/CIF) 
(MILLION USD)          6,385.1      9,109.4     +42.7 
 
CUMULATIVE FOREIGN 
DIRECT INVESTMENT 
STOCK AT THE END OF 
THE PERIOD 
(MILLION USD)         10,365.7     13,573.4     +30.9 
OFFICIAL FOREX RESERVES 
END OF PERIOD* 
(MILLION USD)          9.400.1     16,215.3     +72.5 
 
*CENTRAL BANK'S INTERNATIONAL RESERVES, MONETARY GOLD, 
INCLUDED. 
 
18.  AmEmbassy Bucharest's reporting telegrams are available 
on the Bucharest SIPRNet website: 
www.state.sgov.gov/p/eur/Bucharest/. 
 
Delare