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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2005
BUCHAREST STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Politic and Economic Environment:
Romania's transitional economy has
achieved marginal progress during the last
decade. Large portions of Romania are
suitable for agriculture with some regions
endowed with the highly fertile chernozem
soil, which is so prevalent in neighboring
Ukraine. Agricultural privatization has
proceeded with 75% of the sector transferred
from the state by 1995. Although, periodic
drought, inadequate capital investment have
threatened Romania's historic agricultural
self-sufficiency. Minerals, forestry and fishery
are also significant contributors to economic
output. Romania's capable, low cost work
force and tourism potential hold promise for
the future. Foreign direct investment, which
has historically originated predominately
from EU nations, has totaled US$ 7 billion
over the last decade, cumulatively about
15% of current GDP.
In July 2003, President Iliescu visited
President Vladimir Putin in Russia. The trip
was made for the purpose of signing a
mutual friendship treaty. Earlier, in May 2003,
Romania and Russia reached an agreement,
which mutually recognized national
sovereignty and their respective borders.
Efforts were also made to resolve a dispute
over the annexation of the country now
known as Moldova by the former Soviet
Union in 1940. 1
An early election in 2005 now seems highly
likely, after the constitutional court thwarted
the government's efforts at judicial reform.
There is a possibility that a new prime
minister will be appointed, avoiding an
election, but this would merely perpetuate
the political uncertainty. The main
government parties are expected to emerge
from an election with an enhanced
parliamentary majority. However, reform
Key Information Contacts
National Securities Commission www.cnvmr.ro
Ministry of Public Finance www.mfinante.ro
National Bank of Romania www.bnro.ro
ECONOMIC RATIOS
Domestic
savings
PAGE 64
Romania
Lower-middle-income group
Trade
Indebtedness
Investment
delays associated with an election risk
endangering EU accession in 2007. 2
Economic Performance:
On the back of improving macroeconomic
stability and buoyant economic growth,
S&P’s recently revised its outlook on
Romania’s sovereign credit ratings from
stable to positive and consequently placing
the county into investment grade level . The
outlook change is based on the strong
commitment of the new centrist Government
to step up economic, institutional and
structural reforms, expected to strengthen
country’s perspectives to join EU in 2007.
The unemployment rate has continued on a
declining path throughout the 2004 year,
after having reached a maximum in February
and March (7.8%). Since then, the rate has
continuously decreased, with the exception
of November when it slightly increased by
0.1% month over month basis.
2004 inflation dropped for the first time below
10% to 9.3% year over year basis in
December 2004, marginally exceeding the
9% initial target. .An important contribution to
the drop in last year inflation came also from
- National Bank of Romania, which
maintained a restrictive monetary policy up
to June, thus avoiding a surplus of cash in
the economy.
Tax collection improvement has reduced the
January - November fiscal deficit to 0.2% of
GDP, in spite of the electoral year.
Announced as one of the main priorities of
the new Cabinet formed by a coalition of four
reformist centre-right parties headed by the
new Prim-Minister, fiscal code has been
amended to allow the introduction of the flat
income tax of 16% as of January 1st 2005.
Starting from the same date, the tax on
GROWTH OF INVESTMENT AND GDP
(%)
20
15
10
5
0
-5
-10
-15
97
GDI GDP
corporate profit has also been lowered to
16% from 25%.
According to preliminary estimates, in 2004
current account deficit widened to 6.2% of
GDP (as against 5.8% in 2003) on the back
of imports inflated by higher consumption
and ROL appreciation. FDI financed 70% of
the gap in line with last year coverage. 2004
FDI expectations point to US$ 4.7 billion,
80% above the established US$ 2.6 billion
target, suggesting a 6.2% share of GDP (as
against 2.7% one year earlier). Such a strong
hike in FDI’s share is mainly due to the
EBRD and IFC’s payments totaling US$ 222
million for 25% stake of Romanian
Commercial Bank as well as OMV’s US$ 871
million paid for 33.34% stake in SNP Petrom.
Spending to repair flood damage is likely to
result in a larger than planned budget deficit
in 2005. First-quarter real GDP growth of
5.9% year on year underpins our forecast for
real GDP growth of 5.6% in 2005. The
authorities have revised upwards their yearend
inflation targets for 2005 and 2006 to
7.5% (previously 7%) and 6% (previously
5%), respectively. We forecast year-end
inflation of 8% in 2005 (unchanged from our
previous forecast), given the high level of
aggregate demand and the upward pressure
on energy prices, and 6.5% in 2006
(previously 6%). 3
1 Economic and Political Overview, County Watch
Incorporated, 2005
2 Romania Country Report, Economic and Political Outlook,
The Economist, www.economist.com
3 Romania Country Report, Economic and Political Outlook,
The Economist, www.economist.com
98 99 00 01 02 03
* World Bank reports