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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 BUCHAREST STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment The main short-term political issue for Romania is whether the fractious government coalition will stumble on until the next scheduled parliamentary election in late 2008 or whether there will be an early election in 2007. Relations between the two senior parties in the ruling coalition, the center-right NLP and the center-left DP, are unlikely to improve, especially as senior figures in the DP are increasingly vocal in their public criticisms of their coalition partners. But as the EU does not appreciate the “back stage” or “front” battles between coalition parties, they may remind the Romanian officials that the Post-Accession Program is much more needed for the country itself rather than the political scandals. The European Commission recommended in its September 26th report that Romania and Bulgaria be admitted to the EU at the start of 2007. Although the Commission's conclusion is only a recommendation to the EU member states, in practice it all but guarantees that the two south-east European states will join the EU in January 2007. However, Romania and Bulgaria will continue to be subject to monitoring and controls even after formal accession, in order to ensure that commitments made during accession negotiations are fulfilled. Strong growth in Romania in recent years has been underpinned by generally sound macroeconomic management, significant disinflation and structural reform. However, macroeconomic stability and growth prospects are threatened by the authorities' failure to address the risks posed by an overheating economy and a growing currentaccount deficit. This failure was reflected in the breakdown of Romania's precautionary stand-by agreement with the IMF in October 2005 (the agreement expired in July 2006) and the most recent warnings from an IMF staff visit in October 2006. Excess demand, driven by a pro-cyclical fiscal policy, rising employment and strong wage and credit growth, is pushing the annual currentaccount deficit above 10% of GDP. Economic Performance Real GDP forecasts for 2007 and 2008 have been revised upwards to 6% and 5.2%, respectively (from 5.7% and 5% previously), after estimated growth of 7% in 2006. However, stronger growth will be at the expense of worsening macroeconomic imbalances. Real GDP rose by 7.4% year on year in the first half of 2006, driven by extremely strong domestic demand. Consumption is being driven by a procyclical fiscal policy, strong real wage growth, surging credit expansion and rising employment. Fiscal policy will continue to be expansive after EU accession, and the approach of the next election will delay any tightening of fiscal or wage policies. These two factors will contribute to continued high levels of private consumption and investment activity in 2007-08. However, the NBR's restrictive monetary policy will eventually start to have an impact on household borrowing and spending habits. Although the NBR seems to have understood that placing too many restrictions on the local banks in order to be tight on crediting, will not put the local banks on the same grounds as their Western counterparts, leading to unfair competition. Therefore, they will leave to the banks to set their own terms of crediting, but meeting the general prudential conditions. Investment activity will continue to be the main engine of growth, as new and modernized production facilities come on stream, large public investment projects get under way and Romania continues to receive large inflows of FDI. It is expected that the FDIs to exceed US$ 8.5 billion in 2007, the third one in the “Emerging Europe” after Turkey and Russia. A number of factors have resulted in faster than expected disinflation in the third quarter of 2006, including the delayed implementation of the government's infrastructure spending program, the central bank's monetary policy tightening, delays in scheduled increases in administered prices and sharp falls in food prices. Headline inflation fell to 5.5% in September, from 7.1% in June and 8.4% in March, and to 4.8% in October. At the end of the year, the NBR hit the target (5%) and got even a better result 4.9% The Central Bank maintained its forecast for year-end inflation in 2007 to 4% and issued a strong warning about upside pressures, including rapid growth in aggregate demand. Higher interest rates, the full liberalization of the capital account and a generally positive view of Romania's prospects after EU accession will stimulate speculative capital inflows in 2007-08. These could result in further significant real appreciation, a costly sterilization of the inflows, or some combination of the two. Following an average real effective appreciation of 17.7% against a trade-weighted basket of currencies in 2005, the ROL is expected to appreciate in real terms against the same basket by 5.7% in 2006.* * The Economist Intelligence Unit Ltd., July 2006. Key Information Contacts National Securities Commission www.cnvmr.ro Ministry of Public Finance www.mfinante.ro National Bank of Romania www.bnro.ro 2005-ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a) 2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) Services Industry Agriculture & forestry Private consumption Public consumption Gross fixed investment Change in stocks Exports of goods & services Imports of goods & services 54.9 35.0 80 75.2 60 40 20 12.3 23.4 33.5 10.1 0 -20 -0.4 -40 -60 -44.0 PAGE 60
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 BUCHAREST STOCK EXCHANGE ROMANIA ECONOMIC CHARTS AND TABLES 2002 (a) 2003 (a) 2004 (a) 2005 (a) 2006 (b) GDP at market prices (Lei billions) 151.5 197.6 246.4 283.0 324.3 GDP (US$ billions) 45.8 59.5 75.5 97.1 114.2 Real GDP growth (%) 5.1 5.2 8.4 4.1 6.9 Consumer price inflation (av; %) 22.5 15.3 11.9 9.0 6.8 Population (million) 21.8 21.7 21.7 21.6 21.6 Exports of goods fob (US$ millions) 13,876 17,618 23,485 27,730 33,001 Imports of goods fob (US$ millions) -16,487 -22,155 -30,150 -37,348 -46,478 Current-account balance (US$ millions) -1,536 -3,456 -6,382 -8,312 -12,451 Foreign-exchange reserves excl gold (US$ millions) 6,125 8,040 14,616 19,872 26,081 Total external debt (US$ billions) 16.7 22.6 30.0 36.4 (b) 42.8 Debt-service ratio, paid (%) 19.0 16.9 17.1 16.9 (b) 17.2 Exchange rate (av) Lei:US$ (c) 3.31 3.32 3.26 2.91 2.84 (a) Actual. (b) Economist Intelligence Unit estimates. (c) The redenomination of the Romanian leu on 1 July 2005 entailed the dropping of four zeroes: one new leu (RON) = 10,000 old lei (ROL). ECONOMIC FORECAST SUMMARY 2006 2007 2008 2009 2010 2011 Real GDP growth (%) 7.0 6.0 5.2 4.6 4.6 3.7 Consumer price inflation (av; %) 6.6 5.6 5.1 4.1 3.2 3.0 General government budget balance (% of GDP) -1.5 -3.0 -3.0 -2.8 -2.3 -2.2 Current-account balance (% of GDP) -10.0 -11.5 -11.4 -10.4 -9.4 -8.6 Commercial bank lending rate (end-period; %) 13.8 14.0 12.0 11.0 9.0 8.0 Exchange rate Lei:US$ (av) 2.84 2.70 2.77 2.79 2.80 2.77 Exchange rate Lei:[euro] (av) 3.55 3.68 3.70 3.61 3.53 3.50 2005-PRINCIPAL EXPORTS (FOB) (%) 2005-PRINCIPAL IMPORTS (CIF) (%) Textiles & products Machinery & transport equipment Machinery & transport equipment Minerals fuels, lubricants, etc Base metals & products Minerals & fuels Other Textiles, clothing & footwear Chemicals, plastics & rubber Other 17.6 14.7 23.4 15.5 18.9 10.2 11.0 7.5 37.8 43.4 2005-MAIN DESTINATION OF EXPORTS (%) 2005-MAIN ORIGINS OF IMPORTS (%) Italy Germany Germany Italy France EU25 France EU25 19.2 14.0 15.5 14.0 7.9 8.3 67.6 62.2 The Economic Intelligence Unit Ltd., October 2006 PAGE 61
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