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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 BUCHAREST STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment Relations between the two senior parties in the ruling coalition, the center-right NLP and the center-left DP, have reached breaking point following the latest dispute between the prime minister, Calin Popescu Tariceanu (of the NLP), and the president, Traian Basescu (formerly of the DP). Relations with the two junior coalition partners, the Hungarian Democratic Union in Romania (HDUR) and the Conservative Party (CP), are also strained. A decision on the timing of Romania's EU accession will be made in late September 2006, after the European Commission delayed making a final recommendation in its May 16th report. The report highlighted four "areas of serious concern" for Romania: the lack of fully functioning payments agencies for EU agricultural aid; shortcomings in the system for animal registration needed to pay EU farm subsidies and to maintain proper veterinary standards; a shortage of facilities for collecting and treating animal by-products so as to prevent BSE (otherwise known as mad-cow disease); and the lack of a computer system in the tax administration that is compatible with the rest of the EU, preventing collection of valueadded tax (VAT) throughout the internal EU market. It will issue a report on September 26th and make a recommendation on whether Romania and Bulgaria should be allowed to join the EU in January 2007 or whether membership should be delayed until January 2008. The European Council will then vote and is expected to follow the Commission's recommendation. In a second budget revision in July, the government decided to increase the budget deficit target to 2.5% of GDP. The government's budget revisions have provoked criticism from the IMF, which had advocated a balanced budget in 2006 and small surpluses in subsequent years. The European Commission has also expressed concern about the current policy mix and urged the authorities to adopt a more responsible fiscal stance. Economic Performance Real GDP rose by 6.9% year on year in the first quarter of 2006, with private consumption growing by 10.9%. Private consumption growth is expected to slow compared with 2005, but not as sharply as previously expected (retail sales, which can be taken as a rough proxy for consumption growth, grew by 24% year on year in real terms in the first quarter of 2006). Investment activity will continue to be the main engine of growth in 2006-07. Fixed investment grew by 11.4% year on year in the first quarter and is forecast to grow by 12% in 2006 and by 13.5% in 2007, as new and modernized production facilities come on stream, large public investment projects get under way and inflows of foreign direct investment (FDI) continue to rise. Agricultural output is expected to rebound, rising by about 4% year on year in 2006, despite flooding early in the year. Industry (local definition, excluding construction), which grew by 4.8% year on year on a value-added basis in the first quarter, is expected to perform above the official forecast, growing by about 5% year on year in 2006. The NBR set year-end inflation targets of 7.5% for 2005 and 5% for 2006, within a band of ±1 percentage point. The central bank's credibility has been dented, however, by the failure to meet the 2005 target, with inflation reaching 8.6% year on year in December and averaging 9% annually. Inflationary pressures remain strong as a consequence of rapid growth in real wages and credit, as well as upward adjustments to energy prices. In the first half of 2006 consumer price inflation has remained above the target band: in May the year-on-year inflation rate rose to 7.3% from 6.9% in April. We assume that the central bank's monetary policy tightening and a strong leu will aid disinflation in 2006. However, the 2006 target is unlikely to be met because of scheduled increases in excise taxes and energy prices. Higher interest rates, the liberalization of the capital account and a generally positive view of Romania's prospects will stimulate speculative capital inflows in 2006-07. These could result in further significant real appreciation, a costly sterilisation of the inflows, or a combination of the two. * 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 SOCIAL PRODUCT (%) (ab) 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 62
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 BUCHAREST STOCK EXCHANGE ROMANIA ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (a) GDP at market prices (Lei billions) 116.8 151.5 197.6 246.4 283.0 GDP (US$ billions) 40.2 45.8 59.5 75.5 97.1 Real GDP growth (%) 5.7 5.1 5.2 8.4 4.1 Consumer price inflation (av; %) 34.5 22.5 15.3 11.9 9.0 Population (millions) 22.4 21.8 21.7 21.7 21.6 Exports of goods FOB (US$ millions) 11,385 13,876 17,618 23,485 27,730 Imports of goods FOB (US$ millions) -14,354 -16,487 -22,155 -30,150 -37,348 Current account balance (US$ millions) -2,229 -1,536 -3,456 -6,382 -8,549 Foreign exchange reserves excl gold (US$ millions) 3,923 6,125 8,040 14,616 19,872 Total external debt (US$ billions) 12.7 16.7 22.6 30.0 39.6 (b) Debt-service ratio, paid (%) 18.3 19.0 16.9 17.0 (b) 18.0 (b) Exchange rate (av) Lei:US$(c) 2.91 3.31 3.32 3.26 2.91 (a) Actual. (b) Economist Intelligence Unit estimates. (c) The redenomination of the Romanian leu on July 1st 2005 entailed the dropping of four zeroes: one new leu (RON) = 10,000 old lei (ROL). KEY INDICATORS 2005 2006 2007 2008 2009 2010 Real GDP growth (%) 4.1 5.2 5.5 5.0 4.5 4.0 Consumer price inflation (av; %) 9.0 7.6 5.7 4.2 3.7 3.2 General government budget balance (% of GDP) -0.8 -1.5 -2.0 -2.4 -2.5 -3.0 Current account balance (% of GDP) -8.7 -9.1 -8.5 -7.7 -6.9 -5.7 Commercial bank lending rate (end-period; %) 15.7 18.0 12.6 10.0 8.0 7.0 Exchange rate Lei:US$ (av) 2.91 2.82 2.68 2.70 2.75 2.77 Exchange rate Lei:[euro] (av) 3.63 3.65 3.73 3.59 3.53 3.47 2005-PRINCIPAL EXPORTS (FOB) (%) (ac) 2005-PRINCIPAL IMPORTS (CIF) (%) (ac) 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 (%) (ac) 2005-MAIN ORIGINS OF IMPORTS (%) (ac) Italy Germany Germany Italy France EU25 France EU25 17.0 11.8 15.5 14.0 5.7 8.3 65.5 62.2 Source: Economist Intelligence Unit ViewsWire PAGE 63
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