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 value-
added 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)
Services
54.9
Industry
2005-COMPONENTS OF SOCIAL PRODUCT (%) (ab)
Agriculture & forestry
35.0
Private consumption
Change in stocks
80
Public consumption
Gross fixed investment
Exports of goods & services
Imports of goods & services
75.2
60
40
20
0
10.1
33.5
23.4
12.3
-0.4
-20
-40
-60
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