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Country Report

Romania

July 2013

Economist Intelligence Unit20 Cabot SquareLondon E14 4QWUnited Kingdom

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Romania

Forecast

Highlights

Outlook for 2013-17 Political stability

Election watch

International relations

Policy trends

Fiscal policy

Monetary policy

International assumptions

Economic growth Inflation

Exchange rates

External sector

Forecast summary

Data and charts Annual data and forecast

Quarterly data

Monthly data

Annual trends charts Monthly trends charts

Comparative economic indicators

Summary Basic data

Political structure

Recent analysisPolitics Forecast updates

Analysis

Economy Forecast updates

Analysis

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Romania 1

Country Report July 2013 www.eiu.com Economist Intelligence Unit Limited 2013


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HighlightsEditor: Joan Hoey

Forecast Closing Date: July 10, 2013

Outlook for 2013-17

The government led by Victor Ponta, comprising parties from the Social Liberal Union (USL) and technocrats,has a large majority and is in a strong position to pursue its policy agenda in 2013-16.

Romania's membership of the border-free Schengen group will be decided at the end of 2013: opponents cite

the country's failure to reform the judiciary and tackle corruption as a reason to block membership.

There is some uncertainty about whether the government will negotiate a new stand-by arrangement with the

IMF from mid-2013, but continued euro zone troubles make this more likely.

The government will find it difficult to reduce the budget deficit as a share of GDP during 2013 without cutting

public-sector personnel and public investment projects.

We forecast real GDP growth of 2.4% in 2013 (formerly 2%), following faster than expected first-quarter

growth, and assuming a good harvest. Growth is forecast to average about 3.5% per year in 2013-17.

After recording a deficit of less than 4% of GDP in 2012, the current account is forecast to record an average

deficit of about 4.7% of GDP in 2013-17.

Review

Renewed bickering broke out between the president and the prime minister in July, despite the post-election

truce agreed in 2012.

On June 18th the Constitution revision commission voted to adopt the draft law for the revision of the

Fundamental Law.

On June 26th the IMF executive board signed off Romania's economic performance under its 2011-13 stand-by

agreement programme.

Gross industrial production grew by 4% month on month in April (1.9% seasonally adjusted) and by 19% year

on year (8.5% seasonally adjusted).

Real GDP growth in the first quarter was 2.2% year on year, much faster than the 1.4% growth rate released at

the time of the flash estimates.

The consumer price index edged up by 0.2% month on month, but remained at 5.3% year on year in May.A surge in exports to the EU in April helped to reduce the merchandise trade deficit (fob:cif) in the first four

months of 2013 by 900m (US$1.2bn) compared with the year-earlier period.

The current account registered a surplus of 54m in the first four months of 2013, compared with a deficit of

1.534bn in the year-earlier period.

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Outlook for 2013-17

Political stability

The Social Liberal Union (USL), the political alliance of the Centre-Left Alliance of the Social Democratic Party (SDP)

and the National Union for the Progress of Romania (UNPR), and the Centre-Right Alliance of the National Liberal

Party (NLP) and the Conservative Party (CP), won a resounding victory at the general election in December 2012. The

president, Traian Basescu, reappointed Victor Ponta as prime minister. By winning a two-thirds majority in both

chambers, the USL is potentially in a strong position to see through its four-year term, provided that the alliance does

not begin to fray.

A breakdown in the USL is one of the main risks to political stability over the next few years. Indeed, a crisis was

narrowly averted recently when the SDP and NLP agreed to disagree about disciplinary action to be taken against an

NLP member who made defamatory statements about the SDP. The USL agreement does not allow public conflicts

between members of the two parties. The political marriage between the SDP and the NLP is one of convenience,

based on the shared aim of achieving power and forming a majority government, rather than strong shared principles.

Inevitably, there is political competition between the two parties and this has sometimes given rise to tensions and

disputes. Policy and personnel tensions between the two parties will inevitably come to the surface, perhaps

particularly after the 2014 presidential election.

Another potential source of political instability is a revival of the 2012 conflict between the government and thepresident, following mutual recriminations in public between the two in early July, in a breach of the truce agreed

following the 2012 elections. Conflict might flare again in coming months when parliament comes to consider the

amendments to the constitution proposed by the constitutional revision commission, led by the NLP and Senate

leader, Crin Antonescu, who is also the USL's candidate in the 2014 presidential election. One of the main objectives

of the ruling USL in changing the constitution is to circumscribe the powers of the president, by strengthening the

role of parliament as the supreme representative body and law-making authority. The draft will be submitted to

parliament for approval and a referendum will be held later this year.

Election watchThe next general election is scheduled for November 2016 and a presidential election is due in late 2014. The USL's

main challenger in the December 2012 election, the Alliance of the Romanian Right (ARD), which is dominated by theDemocratic Liberal Party (DLP) that led the government until April 2012, performed badly, winning only 13.6% of the

seats in both chambers. The alliance dissolved immediately after the election. The DLP now faces the difficult task of

winning back support from a hostile electorate. The populist People's Party-Dan Diaconescu (PP-DD), which recorded

one of the largest shares of the vote ever for a new party in the 2012 election (around 14%), may become the main

focus for disenchanted voters.

Mr Basescu will be unable to stand for another term at the presidential election scheduled for 2014. The USL has

indicated that Mr Antonescu will be its presidential candidate. Mr Antonescu needs the support of the SDP to

promote his bid to run for the presidency, which may keep internal disagreements in the government at bay in the

short term.

International relationsThe report by the European Commission on Romanias progress under the cooperation and verification mechanism,

published on January 30th, was broadly favourable in tone, but argued that the government needed to intensify its

efforts to reform the judiciary and tackle corruption. The Commission will continue to monitor the government's

progress before reporting at the end of 2013. The European Council decided in March 2013 to postpone a decision on

Romanian and Bulgarian entry to the Schengen Area until the end of 2013. The Council said that accession would be a

two-stage process, initially involving the removal of checks at land and sea borders. The Economist Intelligence Unit

expects further delays to Romania's Schengen membership given the "Fortress Europe" climate in recession-hit

Europe.

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Policy trendsOn June 26th the IMF executive board completed the seventh and eighth reviews of Romania's economic performance

under its 2011-13 stand-by agreement programme, which only a few months ago had looked unlikely. The completion

of the agreement, albeit without fulfilment of all the structural reform targets, owes much to the changeover of political

power in 2012 and to the IMF preparedness not to stick to the letter of the agreement given the difficult international

economic environment. Over the past two years, the economy has stabilised, inflation has moderated and the fiscal

and current-account deficits have been greatly reduced. However, the structural reform agenda, including reform ofthe energy, transport and state-owned enterprise sectors, is nowhere near completed. Indeed, completion of the deal

was delayed by three months, from end-March to end-June, to allow the Romanian authorities to meet outstanding

programme targets, including the privatisation of the state-owned rail-freight company CFR Marfa and the launch of

initial public offerings (IPOs) in the energy sector. The Ministry of Transport on June 20th selected private railway

operator Grup Feroviar Roman as the winner in the bidding for CFR Marfa. The company offered Lei905m (US$264m)

for a 51% stake and offered to invest about Lei900m in the unprofitable company. Meanwhile, the procedures for the

listing of Transgaz shares should be finalised by the end of July. The Fund granted three waivers for the non-

observance of performance criteria, in relation to net foreign assets of the National Bank of Romania (NBR, the central

bank); the general government budget balance; and central government arrears. The authorities have undertaken to

take corrective measures to meet the targets. The successful completion of the 2011-13 stand-by agreement does not

alter our view that structural reforms in the energy and transport sectors will continue to face difficulties and delays.

Fiscal policyParliament approved a consolidated budget for 2013 with a deficit target equivalent to 2.1% of GDP on a cash basis.

The government failed to meet its budget deficit target of 2.2% of GDP in 2012, when the actual deficit was Lei14.8bn

(US$4.4bn), equivalent to 2.5% of GDP. This was caused largely by the suspension of some EU funding in December,

following irregularities in payments. These missed payments have since been made up and consequently the

government is on track to keep the budget deficit within 3% of GDP in accrual terms consistent with the ESA 95

definition, allowing an exit from excessive-deficit procedures.

The emphasis of the 2013 budget is on boosting revenue. The consolidated budget targets are predicated on an

official real GDP growth forecast of 1.6% for 2013; our own revised forecast is now 2%. Consolidated budget revenue

is officially forecast to increase by 8.3% year on year, to Lei209.2bn, equivalent to 33.6% of GDP. Expenditure is

projected to grow by 7%, to Lei222.6bn, equivalent to 35.7% of GDP. The budget includes measures to boost revenue,mainly by increasing charges and taxes on energy suppliers that will be recouped from price increases approved by

the energy regulator, ANRE, under the price liberalisation programme (the government brought forward scheduled

increases in excise duties from July to April).

The budget deficit widened by 49.2% year on year in January-April, to Lei7.5bn, equivalent to 1.2% of the full-year

GDP, and more than half of the 2013 deficit target. The government is considering either a 5 percentage point

reduction in the value-added tax (VAT) rate or a significant cut in social security contributions from January 2014,

depending on budget execution in coming months, which appears ambitious given current expenditure trends. The

government is targeting annual consolidated budget deficits equivalent to less than 3% of GDP in 2014-16, as

measured by the ESA 95 methodology, in line with our assumptions.

Monetary policyThe NBR operates an inflation-targeting regime with a target of 2.5% (1 percentage point) for 2013 and 2014.) On July

1st 2013 the NBR undertook the first change to its monetary policy rate since March 2012, reducing the rate by 0.25

percentage points, to 5%. In May the NBR also reduced the corridor on its lending and borrowing facilities around

this rate, from 4 percentage points to 3 percentage points. Domestic banks gave no indication of when they might

reduce interest rates on credit facilities. However, the NBR is clearly shifting its monetary focus away from controlling

inflationary expectations, which it now considers to be on a steady downward trend, towards encouraging economic

recovery. As inflation falls towards the NBRs inflation target, this will permit some monetary relaxation and stimulus

for recovery. Historically, the NBR has favoured small-step changes in interest rates rather than single large changes,

and we expect a series of small cuts in the monetary policy rate in coming months and years. Our long-standing

forecast is that Romania will postpone adoption of the euro until 2016 or 2017 at the earliest, and perhaps indefinitely.

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International assumptions 2012 2013 2014 2015 2016 2017

Economic growth (%)

US GDP 2.2 2.1 2.5 2.3 2.3 2.4

Euro area GDP -0.5 -0.8 0.6 1.2 1.4 1.3

EU27 GDP -0.3 -0.4 0.8 1.4 1.5 1.5

World GDP 2.1 2.1 2.7 2.8 2.8 2.9

World trade 2.4 3.7 5.2 5.4 5.5 5.6

Inflation indicators (% unless otherwise indicated)

US CPI 2.1 1.7 2.2 2.2 2.3 2.3

Euro area CPI 2.5 1.4 1.5 2.0 2.1 1.5

EU27 CPI 2.6 1.7 1.8 2.1 2.2 2.1

Manufactures (measured in US$) -0.6 -3.1 0.6 0.9 1.6 1.9

Oil (Brent; US$/b) 112.0 106.6 104.8 107.3 110.0 115.0

Non-oil commodities (measured in US$) -10.9 -3.7 0.6 -0.2 0.6 2.2

Financial variables

US$ 3-month commercial paper rate (av; %) 0.2 0.1 0.2 0.3 1.2 2.2

3-month rate 0.6 0.2 0.3 0.6 1.0 1.4

US$: (av) 1.29 1.31 1.29 1.27 1.26 1.27

Lei:US$ (av) 3.47 3.41 3.44 3.41 3.31 3.21

Lei: (av) 4.46 4.47 4.44 4.33 4.17 4.08

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Economic growthRecovery from recession in 2009 and 2010 has been modest. Romania avoided negative growth in 2012, with real GDP

growing by 0.7% according to revised data, which provide a more optimistic outlook for growth prospects in 2013.

Both household expenditure and gross fixed capital formation grew more strongly than indicated by original estimates,

indicating the possibility of growing consumer confidence and a more positive investment environment. Seasonally

adjusted quarter-on-quarter growth in the first quarter of 2013 has been revised up from 0.5% to 0.7%, and year-on-

year growth has been revised up from 1.4% to 2.2%. Non-seasonally adjusted growth has been revised upwards onlymarginally, from 2.1% to 2.2%, implying that the upward revision largely affects the seasonal-adjustment coefficient

for the number of working days, rather than the basic data. The frequent major revisions to GDP data over the past six-

nine months suggest that the data will be revised again, and raise doubts about the methodology.

We forecast growth of 2.4% in 2013, boosted by a strong harvest and increased exports to non-EU markets, but this

could be adversely affected by another external shock or an even sharper recession in the euro zone. We expect

growth rates to accelerate in 2014-17, to an annual average of just below 4%. There is little prospect of a strong

recovery in foreign direct investment (FDI) until later in the forecast period. Proposals for off-budget investment in

infrastructure were scrapped by the previous government, but could be reinstated by the USL government,

stimulating a recovery in construction, assuming that financing can be provided by the negotiation of larger than

planned budget deficits.

Economic growth% 2012a 2013b 2014b 2015b 2016b 2017b

GDP 0.7 2.4 3.0 3.8 4.3 4.0

Private consumption 1.0 0.7 1.6 2.2 2.7 3.5

Government consumption 2.4 0.5 1.0 1.0 2.0 1.0

Gross fixed investment 4.9 1.0 8.0 7.0 9.0 8.5

Exports of goods & services -3.0 3.7 7.8 10.2 9.5 9.4

Imports of goods & services -0.9 2.8 7.3 8.4 7.0 8.0

Domestic demand 1.0 -2.8 3.6 3.3 4.2 4.6

Agriculture -21.2 8.0 2.0 1.0 -0.5 2.0

Industry -0.8 2.6 5.0 5.0 5.0 5.0

Services 8.0 1.6 1.8 3.6 4.9 3.8aActual. bEconomist Intelligence Unit forecasts.

Improved absorption of EU funding would contribute to investment in infrastructure, which would boost export

potential over the longer term. Romania has obtained 22bn (US$29bn) in structural funds from the EU budget for

201420, compared with 20bn in the current programming period (2007-13). The country will also receive 17.5bn in

funds for agriculture in 2014-20 under the Common Agricultural Policy (CAP), up from 13.8bn in 2007-13. Romania

has absorbed only 12% of the total structural funding available to it under the 2007 13 budget. This is likely to

improve in coming years, but administrative deficiencies and the need for the government to co-finance projects will

limit prospects for a significant increase in the absorption rate.

InflationThe inflationary outlook has continued to improve, with the annualised CORE2 inflation rate (which excludes

administered prices, volatile prices and alcohol and tobacco prices) falling from 3.3% at end-2012 to 2.7% at end-May,

and the harmonised index for consumer prices (HICP) falling from 4.6% at end-2012 to 4.4% at end-May. Annualconsumer price inflation remained at 5.3% for a third consecutive month in May, after inching up by 0.2% compared

with April. The NBR's revised year-end inflation target of 3.2% (previously 3.5%) takes account of the new schedule

for annual increases in administered prices for electricity and gas, but assumes slower growth of Romania's main trade

partners in 2013 and slower euro zone inflation, as well as a continued fall in international oil prices amid weak global

demand. The persistent negative output gap will continue to have a disinflationary impact throughout 2013-14. Normal

harvests in 2013 and 2014 should bring about a change in the dynamics of volatile food prices, which are likely to

follow a downward path starting from July. Continued uncertainties related to the euro zone economic malaise and

sovereign debt crisis could have a negative impact on exchange-rate developments and capital inflows, and a negative

knock-on effect on inflation. Other uncertainties relate to domestic policy issues, such as the timetable for structural

reforms. We forecast year-end inflation of 3.4% in 2013 and 3.5% in 2014, assuming a less benign policy and external

environment. We expect inflation to come down gradually thereafter, to 2.7% by end-2017.

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Exchange ratesThe value of the leu fell by 4.9% on average in nominal terms against the euro in 2012, to Lei4.46:1, and by 12.1%

against the US dollar, to Lei3.47:US$1. The leu depreciated by 6.5% in real terms against a trade-weighted basket of

currencies. The depreciation of the domestic currency in 2012 was a consequence of a combination of factors,

including domestic political instability related to three changes of government in the first half of the year, and the

attempted impeachment of the president and a scheduled general election in the second half. Risk aversion towards

emerging markets emanating from the Greek and European sovereign debt crises and the worsening economic outlookin the euro zone also took their toll on the leu. The authorities have intervened only moderately to support the

currency or to absorb excess liquidity, prompting speculation that the NBR is happy to allow the currency to

depreciate within certain limits. However, the leu has appreciated against the euro since July 2012, and stood at

Lei4.44:1 on July 9th. We expect the leu to remain subject to turbulence in 2013, given the persistence of euro zone

uncertainties and uncertainty about the timetable for the reduction of the bond-buying programme of the Federal

Reserve (Fed, the US central bank), which may have a negative knock-on effect on emerging markets such as Romania

which have large financing requirements. We forecast a modest real appreciation of the currency in 2013-17, in line

with productivity differentials, as the economy recovers.

External sector

The current-account deficit narrowed by 15.1% year on year in 2012, to 5bn, equivalent to about 3.7% of GDP. Thecurrent account registered a surplus of 54m in the first four months of 2013, compared with a deficit of 1.53bn in the

year-earlier period. A surge in exports helped to keep the current account in approximate balance in April and over the

first four months. The data provide further grounds for optimism that the current-account deficit will be contained at

manageable levels, in line with our forecast for 2013-17. There has been no recovery in FDI in the early months of

2013. Net FDI inflows fell to 322m in the first four months from 494m in the year earlier period, but showed a modest

annual improvement in April. FDI has been in decline since the onset of the global economic and financial crisis in

2008, and in 2012 net inflows fell to the equivalent of 1.2% of GDP, the lowest proportion since the early 1990s. The

current-account data are not expected to change significantly in 2013 compared with 2012, but the deficit will expand

as growth accelerates, averaging just below 5% of GDP per year in 2013-17.

Forecast summaryForecast summary(% unless otherwise indicated)

2012a 2013b 2014b 2015b 2016b 2017b

Real GDP growth 0.7 2.4 3.0 3.8 4.3 4.0

Industrial production growth 2.4 3.6 4.0 4.0 4.0 4.0

Gross agricultural production growth -21.2 8.0 2.0 1.0 -0.5 2.0

Unemployment rate (end-period) 5.6 4.8 4.3 3.8 3.4 2.9

Consumer price inflation (av; national measure) 3.3 4.8 3.2 3.3 3.2 2.8

Consumer price inflation (end-period; national measure) 5.0 3.4 3.5 3.0 2.7 2.7

Consumer price inflation (av; EU harmonised measure) 3.4 4.8 3.2 3.3 3.2 2.8

Commercial bank lending rate 11.3 9.0 8.0 7.0 6.5 6.0

Consolidated budget balance (% of GDP) -2.5 -2.7 -2.7 -2.7 -2.6 -2.5

Exports of goods fob (US$ bn) 51.3 55.2 60.9 68.9 78.4 90.0Imports of goods fob (US$ bn) 62.7 69.4 78.7 90.5 104.3 116.7

Current-account balance (US$ bn) -6.3 -5.6 -8.5 -10.9 -13.0 -11.7

Current-account balance (% of GDP) -3.7 -3.1 -4.5 -5.4 -5.8 -4.6

External debt (end-period; US$ bn) 129.3c 130.3 131.5 133.9 137.2 140.9

Exchange rate Lei:US$ (av) 3.47 3.41 3.44 3.41 3.31 3.21

Exchange rate Lei:US$ (end-period) 3.36 3.55 3.38 3.42 3.22 3.20

Exchange rate Lei: (av) 4.46 4.47 4.44 4.33 4.17 4.08

Exchange rate Lei: (end-period) 4.43 4.65 4.36 4.30 4.06 4.06aActual. bEconomist Intelligence Unit forecasts. cEconomist Intelligence Unit estimates.

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Data and charts

Annual data and forecast 2008a 2009a 2010a 2011a 2012a 2013b 2014b

GDP

Nominal GDP (US$ bn) 204.3 164.3 164.8 182.6 169.4 178.8 188.9

Nominal GDP (Lei bn) 515 501 524 557 587 610 650

Real GDP growth (%) 7.9 -6.8 -0.9 2.3 0.7 2.4 3.0

Expenditure on GDP (% real change)

Private consumption 9.4 -9.9 -0.1 1.2 1.0 0.7 1.6

Government consumption 6.8 9.5 -13.6 0.3 2.4 0.5 1.0

Gross fixed investment 16.1 -27.8 -2.3 7.3 4.9 1.0 8.0

Exports of goods & services 7.6 -6.3 14.2 10.9 -3.0 3.7 7.8

Imports of goods & services 7.6 -21.4 12.5 10.3 -0.9 2.8 7.3

Origin of GDP (% real change)

Agriculture 21.4 -0.4 -0.8 11.3 -21.2 8.0 2.0

Industry 7.1 -6.9 1.1 4.5 -0.8 2.6 5.0

Services 4.6 -7.6 -2.9 -1.5 8.0 1.6 1.8

Population and income

Population (m) 21.5 21.5 21.5 21.4 21.4c 21.4 21.4GDP per head (US$ at PPP) 12,749 12,006 12,059 12,603 12,925c 13,452 14,114

Recorded unemployment (av; %) 4.4 7.8 7.0 5.1 5.6 4.8 4.3

Fiscal indicators (% of GDP)

General government revenued 32.0 31.3 32.2 32.6 32.9 33.0 33.1

General government expenditure 36.7 38.5 38.6 36.9 35.4 35.7 35.8

General government balance -4.8 -7.3 -6.4 -4.3 -2.5 -2.7 -2.7

Net public debt 20.8 26.3 28.4 32.4 33.3c 36.9 37.3

Prices and financial indicators

Exchange rate Lei:US$ (av) 2.52 3.05 3.18 3.05 3.47 3.41 3.44

Exchange rate Lei: (av) 3.70 4.24 4.23 4.24 4.47 4.47 4.44

Consumer prices (av; %) 7.8 5.6 6.1 5.8 3.3 4.8 3.2

Stock of money M1 (% change) 15.8 -14.2 2.8 5.2 3.7 -24.1 6.5

Stock of money M2 (% change) 17.3 8.3 6.1 6.3 4.6 4.7 7.5Lending interest rate (av; %) 15.1 17.3 14.1 12.1 11.3 9.0 8.0

Current account (US$ m)

Trade balance -31,875 -12,038 -11,885 -12,550 -11,458 -14,249 -17,819

Goods: exports fob 40,037 33,707 43,367 55,808 51,291 55,171 60,855

Goods: imports fob -71,912 -45,745 -55,252 -68,358 -62,749 -69,420 -78,674

Services balance 4,644 2,010 2,396 2,651 2,677 4,039 4,242

Primary income balance -5,372 -2,635 -2,526 -3,091 -1,881 -1,937 -1,772

Secondary income balance 8,884 5,708 4,757 4,646 4,316 6,524 6,889

Current-account balance -23,719 -6,955 -7,258 -8,344 -6,346 -5,623 -8,461

External debt (US$ m)

Debt stock 102,539 120,092 124,358 129,822 129,310c 130,271 131,460

Debt service paid 18,105 16,344 18,586 19,096 15,269c 20,396 20,331

Principal repayments 14,475 13,169 15,784 15,733 12,251c 17,676 17,683International reserves (US$ m)

Total international reserves 39,750 44,437 48,065 48,189 46,711 47,829 49,507aActual. bEconomist Intelligence Unit forecasts. cEconomist Intelligence Unit estimates. dConsolidated government budget, including local and

social security budgets.Source: IMF, International Financial Statistics.

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Quarterly data 2011 2012 2013

2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

General government finance (Lei bn; cumulative)

Revenue 43.4 46.6 50.0 45.7 47.3 48.1 52.1 47.0

Expenditure 49.5 49.0 60.2 49.1 50.7 48.5 59.7 51.2

Balance -6.1 -2.4 -10.2 -3.4 -3.4 -0.4 -7.6 -4.2

Output

Index of industrial production (2000=100) 107.0 107.0 110.7 107.1 109.9 108.8 114.4 112.2

Index of industrial production (% change, year on year) 6.9 7.9 2.9 1.8 2.7 1.7 3.4 4.7

Employment, wages and prices

Employment, state sector (end-period 000) 4,185 4,201 4,172 4,257 4,311 4,321 4,312 4,361

Employment, state sector (% change, year on year) -1.9 0.2 1.7 3.5 3.0 2.9 3.3 2.4

Unemployment rate (end-period; % of the labour force) 4.8 4.9 5.2 5.1 4.6 5.0 5.6 5.6

Average gross wages (Lei per month) 2,033 2,016 2,090 2,059 2,130 2,129 2,218 2,171

Average gross wages (% change, year on year) 3.6 8.8 7.9 3.6 4.7 5.6 6.1 5.5

Consumer prices (2000=100) 143.6 142.5 143.5 145.3 146.3 148.3 150.5 153.5

Consumer prices (% change, year on year) 8.2 4.2 3.4 2.6 1.9 4.1 4.8 5.7

Producer prices (2000=100) 163.4 166.0 168.1 171.2 173.7 176.8 177.7 n/a

Producer prices (% change, year on year) 8.7 8.7 7.7 5.9 6.4 6.5 5.7 n/a

Financial indicatorsExchange rate Lei:US$ (av) 2.87 3.01 3.22 3.32 3.45 3.61 3.49 3.32

Exchange rate Lei:US$ (end-period) 2.93 3.22 3.34 3.28 3.54 3.50 3.36 3.45

NBR reference rate (%; end-period) 6.3 6.3 6.1 5.5 5.3 5.3 5.3 5.3

M1 (end-period; Lei bn) 80.04 83.97 85.83 84.93 87.84 89.25 89.02 88.79

M1 (% change, year on year) -0.6 3.0 5.2 9.2 9.7 6.3 3.7 4.5

M2 (end-period; Lei bn) 196.09 204.77 212.06 214.29 216.45 220.77 221.83 225.11

M2 (% change, year on year) 2.0 6.3 6.3 11.1 10.4 7.8 4.6 5.1

Sectoral trends

Manufacturing index (2000=100) 108.6 108.7 110.7 105.7 111.3 109.9 114.7 n/a

Manufacturing index (% change, year on year) 6.9 8.8 2.8 1.6 2.5 1.1 3.6 n/a

Mining index (2000=100) 102.8 103.7 104.8 106.0 109.4 117.9 121.0 n/a

Mining index (% change, year on year) 8.2 2.6 0.2 3.8 6.5 13.7 15.5 n/a

Foreign trade (US$ m)Exports fob 15,963 16,243 15,660 14,522 14,502 13,940 14,950 15,285

Imports cif 20,323 19,610 19,393 16,779 18,210 17,180 18,106 16,692

Trade balance -4,361 -3,367 -3,733 -2,258 -3,708 -3,240 -3,157 -1,407

Balance of payments (US$ m)

Merchandise trade balance fob-fob -3,927 -3,269 -3,508 -2,240 -3,332 n/a n/a n/a

Services balance 480 639 973 570 444 n/a n/a n/a

Primary income balance -1,779 -470 -513 -839 -700 n/a n/a n/a

Net transfer payments 1,237 1,076 1,541 1,495 1,097 n/a n/a n/a

Current-account balance -3,989 -2,024 -1,507 -1,014 -2,491 -1,934 -873 n/a

Reserves excl gold (end-period) 49,782 45,470 42,939 46,193 41,473 41,964 41,162 41,274Sources: National Bank of Romania; National Statistical Institute, Monthly Statistical Bulletin; IMF, International Financial Statistics.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exchange rate Lei:US$ (av)

2011 3.19 3.11 2.97 2.84 2.87 2.91 2.97 2.96 3.11 3.15 3.21 3.29

2012 3.37 3.29 3.31 3.32 3.47 3.56 3.70 3.64 3.50 3.51 3.53 3.42

2013 3.29 3.28 3.39 3.37 3.34 3.39 n/a n/a n/a n/a n/a n/a

Exchange rate Lei: (av)

2011 4.26 4.25 4.16 4.10 4.11 4.19 4.24 4.25 4.28 4.32 4.35 4.33

2012 4.34 4.35 4.37 4.38 4.44 4.46 4.55 4.52 4.50 4.56 4.53 4.49

2013 4.38 4.38 4.39 4.38 4.34 4.48 n/a n/a n/a n/a n/a n/a

Real effective exchange-rate index (CPI-based; 1997=100)

2011 156.62 158.72 163.37 167.48 166.38 162.76 159.97 159.03 156.75 156.08 154.74 154.81

2012 153.43 153.77 153.61 152.85 149.99 148.78 145.14 146.10 149.17 147.85 148.36 150.57

2013 157.94 158.69 157.79 159.02 n/a n/a n/a n/a n/a n/a n/a n/a

Budget revenue (Lei bn)

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2011 14.6 12.8 14.1 16.5 12.7 14.2 17.2 14.2 15.2 17.1 14.4 18.5

2012 16.3 13.0 16.4 16.6 15.2 15.4 17.4 15.3 15.4 18.3 16.0 17.7

2013 16.0 13.3 47.0 65.0 81.1 n/a n/a n/a n/a n/a n/a n/a

Budget expenditure (Lei bn)

2011 13.8 16.0 17.0 15.6 15.8 18.1 17.3 15.8 15.9 16.7 17.5 26.0

2012 15.3 16.7 17.1 18.3 17.5 15.0 17.5 15.4 15.5 18.4 19.6 21.7

2013 14.9 16.8 51.2 72.5 87.6 n/a n/a n/a n/a n/a n/a n/a

Budget balance (Lei bn)

2011 0.8 -3.2 -2.8 0.8 -3.1 -3.8 -0.1 -1.6 -0.7 0.4 -3.1 -7.52012 1.0 -3.7 -0.7 -1.6 -2.2 0.4 -0.2 -0.1 -0.1 0.0 -3.6 -4.0

2013 1.0 -2.4 -4.2 -7.5 -6.6 n/a n/a n/a n/a n/a n/a n/a

Deposit rate (%)

2011 6.7 6.7 6.5 6.5 6.4 6.3 6.2 6.1 6.1 6.1 6.1 6.1

2012 6.0 6.0 5.8 5.7 5.5 5.4 5.3 5.3 5.2 5.2 5.3 5.2

2013 5.2 5.2 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Lending rate (%)

2011 12.4 12.6 12.5 12.2 12.1 11.9 11.7 11.8 12.0 12.1 12.1 12.1

2012 11.9 11.6 11.4 11.0 11.0 11.1 11.1 11.2 11.3 11.3 11.4 11.5

2013 11.6 11.5 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

M1 (% change, year on year)

2011 4.5 3.3 1.7 2.0 -0.7 -0.6 3.1 2.3 3.0 7.2 4.8 5.2

2012 8.0 8.6 9.2 11.1 10.8 9.7 8.7 7.9 6.3 4.2 5.4 3.7

2013 -0.6 -0.5 4.5 3.1 2.2 n/a n/a n/a n/a n/a n/a n/aM2 (% change, year on year)

2011 6.4 4.9 2.7 2.5 2.4 2.0 4.6 4.0 6.3 6.0 5.6 6.3

2012 8.4 9.6 11.1 12.1 12.3 10.4 10.8 9.8 7.8 8.3 7.5 4.6

2013 3.2 2.7 5.1 4.3 3.3 n/a n/a n/a n/a n/a n/a n/a

Industrial production (% change, year on year)

2011 13.8 13.4 11.5 6.5 11.8 2.8 3.8 15.4 6.0 3.8 5.6 -1.0

2012 4.0 1.6 0.3 0.8 5.4 1.9 4.1 1.7 -0.6 6.3 2.3 1.3


Retail sales (% change, year on year)

2011 -5.3 -3.1 -3.9 -2.0 -2.5 -7.4 2.2 -2.4 -4.2 2.6 3.8 6.9

2012 9.2 3.0 3.9 4.7 6.7 4.5 5.8 6.5 5.1 3.3 3.0 -4.1

2013 3.0 1.6 -4.2 2.8 -4.4 n/a n/a n/a n/a n/a n/a n/a

BET stockmarket index (av; Sep 22nd 1997=1,000)2011 5,687 5,685 5,849 5,943 5,639 5,537 5,453 4,742 4,479 4,475 4,418 4,318

2012 4,483 5,080 5,259 5,290 4,889 4,445 4,628 4,782 4,873 4,847 4,821 4,871

2013 5,559 5,554 5,685 5,458 5,404 5,361 n/a n/a n/a n/a n/a n/a

Consumer prices (av; % change, year on year)

2011 7.0 7.6 8.0 8.3 8.4 7.9 4.9 4.3 3.5 3.6 3.4 3.1

2012 2.7 2.6 2.4 1.8 1.8 2.0 3.0 3.9 5.3 5.0 4.6 5.0

2013 6.0 5.6 5.3 5.3 5.3 n/a n/a n/a n/a n/a n/a n/a

Producer prices (av; % change, year on year)

2011 10.2 10.9 11.0 9.6 8.0 8.4 9.4 8.7 8.1 8.3 7.9 7.0

2012 6.0 5.9 5.8 6.5 6.7 5.8 5.7 7.2 6.6 6.9 5.5 4.9

2013 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Average monthly wages (% change, year on year)

2011 -0.2 0.2 -0.9 4.7 2.3 3.8 8.5 8.6 9.3 8.8 8.1 6.9

2012 3.0 4.3 3.4 3.6 5.0 5.6 5.9 5.6 5.2 6.5 5.8 6.1


Unemployment rate (% of the labour force)

2011 6.8 6.7 6.0 5.5 5.0 4.8 4.8 4.9 4.9 4.9 5.1 5.2

2012 5.4 5.4 5.1 4.8 4.6 4.6 4.9 5.0 5.0 5.2 5.4 5.6

2013 5.8 5.8 5.6 5.3 5.0 5.0 n/a n/a n/a n/a n/a n/a

Total exports fob (US$ m)

2011 4,541.2 4,790.4 5,708.1 4,887.3 5,544.8 5,413.2 5,426.0 4,956.1 5,817.0 5,634.0 5,614.1 4,326.9

2012 4,522.2 4,621.8 5,369.0 4,666.8 5,169.7 4,721.3 4,691.7 4,326.4 4,887.3 5,450.2 5,402.2 4,075.8

2013 4,918.2 5,170.6 5,243.1 5,305.2 n/a n/a n/a n/a n/a n/a n/a n/a

Total imports cif (US$ m)

2011 4,823.0 5,350.1 6,948.2 6,309.6 7,261.4 6,717.4 6,401.0 6,218.2 6,957.0 6,708.4 6,884.3 5,672.5

2012 5,120.0 5,293.0 6,358.1 5,882.9 6,486.4 5,899.3 5,609.4 5,578.0 5,954.4 6,889.1 5,948.7 5,240.4

2013 5,313.8 5,448.7 5,970.6 6,088.7 n/a n/a n/a n/a n/a n/a n/a n/aTrade balance fob-cif (US$ m)

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2011 -282 -560 -1,240 -1,422 -1,717 -1,304 -975 -1,262 -1,140 -1,074 -1,270 -1,346

2012 -598 -671 -989 -1,216 -1,317 -1,178 -918 -1,252 -1,067 -1,439 -547 -1,165

2013 -396 -278 -728 -784 n/a n/a n/a n/a n/a n/a n/a n/a

Foreign-exchange reserves excl gold (US$ m)

2011 44,609 44,330 46,591 47,675 47,168 49,782 46,684 47,001 45,470 45,078 42,184 42,939

2012 43,137 44,870 46,193 45,420 41,645 41,473 39,436 38,902 41,964 41,322 40,487 41,162

2013 42,644 42,157 41,274 42,369 n/a n/a n/a n/a n/a n/a n/a n/aSources: National Bank of Romania; IMF, International Financial Statistics; Haver Analytics.

Annual trends charts

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Monthly trends charts

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Comparative economic indicators

Basic data

Land area

238,391 sq km; 12th-largest in Europe

Population

21,528,627 (May 28th 2008)

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Main towns

Population in '000 (July 1st 2006)

Bucharest (capital): 1,931

Timisoara: 304

Iasi: 317

Craiova: 301

Constanta: 306

Galati: 297

Cluj-Napoca: 306

Brasov: 281

Climate

Continental

Weather in Bucharest (altitude 92 metres)

Hottest month, July, 16-30C (average daily minimum and maximum) coldest month, January, minus 7-1C driest

month, February, 33 mm average rainfall; wettest month, June, 89 mm average rainfall

Language

Romanian

Weights and measures

Metric system

Currency

Leu = 100 bani; the plural of leu is lei

Fiscal year

Calendar year

Time

Two hours ahead of GMT

Public holidays

January 1st-2nd, January 6th, Easter (Orthodox calendar), May 1st, December 1st, December 25th-26th

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Political structure

Official nameRomania

Legal system

Parliamentary republic; a new constitution was adopted in 1991 and 2003

National legislature

Bicameral parliament composed of the Senate (176 seats) and the Chamber of Deputies (412 seats). Both chambers are

directly elected from 41 multimember constituencies, comprising 40 counties and the municipality of the capital,

Bucharest

Electoral systemUniversal direct suffrage over the age of 18

National elections

December 9th 2012 (legislative); November 26th and December 6th 2009 (presidential). The next parliamentary election

is scheduled for December 2016 and the next presidential election is scheduled for late 2014

Head of state

President, Traian Basescu

National government

Cabinet, headed by the prime minister, nominated by the president. The Social Liberal Union (USL) government led bythe prime minister, Victor Ponta, comprises the Centre-Left Alliance of the Social Democratic Party (SDP) and the

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National Union for the Progress of Romania (UNPR), and the Centre-Right Alliance (ACD) of the National Liberal

Party (NLP) and the Conservative Party (CP)

Opposition parties

Christian Democrat-New Generation Party (CD-PNG); Democratic Liberal Party (DLP); Greater Romania Party (GRP);

Hungarian Union of Democrats in Romania (HUDR) People's Party-Dan Diaconescu (PP DD)

Prime minister: Victor Ponta (SDP)

Deputy prime minister & minister of public administration & regional development: Nicolae Liviu Dragnea (SDP)

Deputy prime minister & minister of finance: Daniel Chitoiu (NLP)

Deputy prime minister without portfolio: Gabriel Oprea (UNPR)

Key ministers

Agriculture, forests & rural development: Daniel Constantin (CP)

Communications & information technology: Dan Nica (SDP)

Culture: Daniel Constantin Barbu (NLP)

Defence: Mircea Dusa (SDP)

Economy: Varujan Vosganian (NLP)

Education & research: Remus Pricopie (SDP)

Environment & water management: Rovana Plumb (SDP)

European affairs: Leonard Orban (independent)

Foreign affairs: Titus Corlatean (SDP)

Health: Gheorghe Eugen Nicolaescu (NLP)

Interior: Radu Stroe (NLP)

Justice: Mona Pivniceru (independent)

Labour, social protection & the family: Mariana Campeanu (NLP)

Transport & infrastructure: Relu Fenechiu (NLP)

Parliamentary speakers

Lower house: Valeriu Zgonea (SDP)

Upper house: Crin Antonescu (NLP)

Central bank governor

Mugur Isarescu

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Recent analysisGenerated on July 16th 2013

The following articles were published on our website in the period between our previous forecast and this one, and serve

here as a review of the developments that shaped our outlook.

Politics

Forecast updates

June 20, 2013: Political stability

Changes seek to limit presidential power

Event

On June 18th the constitutional revision commission voted (with 17 votes in favour and one abstention) to adopt a

draft law on the revision of the Fundamental Law.

Analysis

The constitutional revision commission, led by the National Liberal Party (NLP) and Senate leader, Crin Antonescu,

who is also the Social Liberal Union (USL) candidate in the 2014 presidential election, was charged with drawing up a

draft law on revising the Constitution. Comprising representatives from all parliamentary parties, the commission

discussed more than 500 amendments from May 29th until June 19th. The final vote on the draft revisions was taken

in the absence of members from the opposition Democratic Liberal party (DLP) and People's Party-Dan Diaconescu

(PP-DD). The only representative of the opposition present, who abstained from the vote, was from the Hungarian

Union of Democrats in Romania (HUDR). The DLP and PP-DD announced in advance their intention not to attend the

vote, in protest at an earlier decision by the commission to keep Romania's bicameral parliament, rather than advocate

a unicameral parliament, as proposed by the country's president (and former DLP leader) Traian Basescu.

One of the main objectives of the ruling USL in changing the constitution is to circumscribe the powers of thepresidentin a rebuke to the incumbent, who set out to be what he called a "player president", extending the

traditional remit of the office beyond the usual foreign policy role. To that end, the amendments will seeks to

strengthen the role of parliament as the supreme representative body and law-making authority, including by

changing the competence of the two chambers, simplifying legislative procedure and insisting on a limit of 300

parliamentarians. The amendments will seek to establish the proper constitutional relations between the government

and the president, including the representation of the state in international relations. Another important amendment to

the Constitution refers to the creation of a new administrative system, introducing a new administrative and territorial

level represented by the regions (which would include the present-day counties).

The draft will be submitted to parliament for approval and a referendum will be held later this year. In the meantime,

there will be further debate inside and outside parliament. The European Commission is expected to scrutinise the

changes and will probably take exception to some.

Impact on the forecast

The draft law is in line with our view that the conflict between the government and the president will rumble on during

2013 and 2014.

Analysis

July 5, 2013

Essay: A new age of protest

We are witnessing an upsurge of protest in Europe, the Middle East, Latin America and Asiawith North America

(Occupy aside) and Sub-Saharan Africa being the odd men out. The mainsprings of the protests may be differentsome are responses to economic distress, others are revolts against dictatorship, still others express the

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aspirations of new middle classes in fast-growing emerging marketsbut all have common underlying features.

The economic, social and political fallout from the 200809 global economic and financial crisis helps only partially

to explain the upsurge of protest, but what appears to be decisive is the erosion of trust in governments, institutions,

parties and politicianswhat is generally termed "the crisis of democracy". The striking features of the protests

are their diffuse, inchoate character, their disavowal of politics and ideology, and their self-conscious rejection of

organisation and leadership. It is therefore a misnomer to talk about a "new age of revolution": today's protest

movements bear little resemblance to their 20thcentury predecessors.

Within the generalised wave of protest, it is possible to distinguish between several broad types of protestmovement.

a) Those pertaining to the "Arab Spring", the wave of anti-regime and pro-democracy protests and conflicts that

began in December 2010 in Tunisia and spread to Algeria, Jordan, Egypt, Yemen and other countries, sometimes also

referred to as the "Islamist Winter" as a result of the success of Islamist parties in ensuing elections.

b) There has been an increasing incidence of more traditional types of social unrest, such as strikes and anti-austerity

demonstrations, in response to the continuing negative fallout from the global economic crisis of 200809, which has

led to rising unemployment, poverty and inequality in many countries.

c) There is also a more amorphous category of protest that could be termed "new social movements" (NSMs), as

exemplified by the Turkish protesters, the Indignados in Spain, the Occupy movements in New York and London, and

the Pirates in Germany and other north European countries. Their causes are diverse, their participants are mainly

young and middle-class and their demands are inchoate, but their targets are generally political elites who areregarded as distant, self-serving and corrupt.

The catalysts for these various types of protest movement are diverse (the decades-long dictatorships in the Middle

East, austerity policies in Greece, Bulgaria and Romania, the building of megaprojects in Turkey, Brazil and Macedonia

etc), but all of them share some common features that set them apart from the sorts of protests that were common in

the 20th century.

The drivers of unrest

The sheer number of protests spanning different time zones has caught the attention of commentators everywhere. In

fact, protests have been building a head of steam for several years, certainly in Europe, where there have been

recurrent episodes of unrest and many governments have fallen. Why are protests erupting now and what are their

causesis it simply a coincidence that unrest is sweeping across several continents at the same time?

The backdrop to the recent wave of protest is the 200809 crisis and its aftermath. The negative economic and social

fallout from the crisis is important, although it cannot alone explain the upsurge of unrest. A recent study by the

International Labour Organisation (ILO), World of Work Report 2013: Repairing the Social Fabric, noted that social

unrest has increased in 201112 relative to the precrisis period in 46 of the 71 countries covered. The ILO's index

uses five weighted variables: confidence in government; living standard; local job market; freedom in your life; and

access to Internet. The ILO carried out an empirical assessment to establish the link between its social unrest index

and actual economic indicators measured by its social unrest index. It concluded that economic growth and

unemployment are the two most important determinants of social unrest.

Like the EIU's own social unrest index, the ILO found that Europe is the region most susceptible to social unrest as a

result of the economic repercussions (recession, rising unemployment, growing income inequality) of the crisis and

the post-crisis policy responses (austerity policies and regressive democratic trends). The countries that experienced

the sharpest increases in the risk of social unrest in 201012 are Cyprus, the Czech Republic, Greece, Italy, Portugal,Slovenia and Spain. The risk of social unrest also increased markedly in central and south-east European countries,

among members of the Commonwealth of Independent States (CIS) and in countries in South Asia. In the Middle East

and North Africa (MENA) the risk of social unrest peaked in 2008 and remained high afterwards. The risk of social

unrest declined in Sub-Saharan Africa, which performed well economically in this period (201112), and in East Asia,

South-east Asia and the Pacific, Latin America and the Caribbean, reflecting a relatively swift recovery from the

economic crisis.

Ironically, given the conclusions of its own research, the ILO criticises the EIU's social unrest index for weighting very

heavily the institutional and political weaknesses of developing countries (we probably weight these factors more

highly than others for developed countries too). However, our emphasis on the importance of this factor appears to

be vindicated by recent developments, given that much of the recent unrest in both developed and less developed

countries appears to be motivated by a deep sense of popular dissatisfaction with political elites and institutions.

The trust deficit

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As we argued in our 2009 report,Manning the Barricades, economic distress is almost a necessary condition for

serious instability, but by itself it is not sufficient. Declines in incomes are not always followed by unrest. It is only

when economic distress is accompanied by other structural features of vulnerability that there is a high risk of

instability. The underlying vulnerability to unrest depends on a host of factors, including the degree of income

inequality, the state of governance, levels of social provision, ethnic tensions, public trust in institutions and a

history of unrest.

On this basis, we suggested that Europe would be the worst-affected region, and we singled out Greece and the UK

as the countries in western Europe most likely to suffer social unrest. And even during the economic boom of themid2000s we argued that eastern Europe was particularly vulnerable to external shocks because of the deep-seated

popular dissatisfaction with political systems and democracy. The crisis has reinforced a pre-existing mood of

disappointment with the experience and results of the 20year transition. There has been a marked further decline in

life satisfaction, support for markets and democracy and trust in institutionsto a degree which, a few years ago,

seemed to set the eastern half of the continent apart from the western half. However, in recent years southern Europe

has rapidly caught up with the east in this regard, and western Europe is now not far behind.

Only by giving due consideration to the political dimension can we understand the mainsprings of the new age of

protest and see the common denominators of seemingly diverse protests. It is the growth of popular distrust in

governments, institutions, parties and politicians that is driving many of today's protest movements, whether in

austerity-hit Europe or fast-growing Latin America. There has been a long-term secular trend of declining trust

throughout the Western world since the 1970s; this accelerated and spread after the collapse of communism in 1989

and has sped up again since the 200809 crisis, as has been well documented in regular surveys by Gallup, Pew,Eurobarometer and others.

A Bulgarian political scientist, Ivan Krastev, has investigated the trust deficit in relation to recent events in Europe

and other regions and discusses how the behaviour of political elites in managing the crisis has led to an erosion of

trust and disappointment in democracy (the EIU'sDemocracy Index 2012discusses these issues too). Krastev says

that the new populism is best understood as "the frustration of the empowered": the spread of democracy worldwide

is coinciding with a growing sense of disappointment with democracy.

This decline of public trust in democratic institutions helps to explain what the impoverished inhabitants of Sofia,

Bulgaria have in common with the middle-class demonstrators in Taksim Square, Turkey. The protesters in Turkey are

not motivated by economic hardship or dissatisfaction with the Erdogan government's handling of the economyits

economic record was the main reason the Justice and Development Party (AKP) was reelected in 2007. The unifying

issue is dissatisfaction with Erdogan's style of government, its lack of consultation and its heavy-handed response tothe protests. In Bulgaria, what started off as protests against higher electricity bills a few months ago quickly

metamorphosed into generalised anti-government demonstrations complaining of corruption and lack of transparency,

resulting in the fall of the centre-right government of Boiko Borisov. Within weeks of its election the new centre-left

left government found itself on the receiving end of popular protests against cronyism and corruption, and it is

unlikely to serve a full term.

A modern malady

So who are these new-age protesters, and what do they really want? In the main (though not exclusively) they are led

by young, educated, middle-class individuals who resent their political leaders. They do not generally belong to

political parties or trade unions and prefer the anonymity of Twitter and other social networks to the traditional

political soap boxat least until they are carried aloft into the TV studios, when their social network mobilisations

unexpectedly turn into mass protests. This happened with the five founders of the "tamarrod" (rebellion) movement inEgypt, all in their 20s, who started out organising a petition to oust President Mohamed Morsi and ended up being

guests on prime-time TV talk shows.

The historian Francis Fukuyama argues that new protest movements are the result of the rise of a new global middle

class, who feel alienated from the ruling political elite and who have a sense of entitlement that is not being fulfilled.

The demanding new middle classes are not just a problem for authoritarian regimes or new democracies, according to

Fukuyama, but for established democracies too. However, he notes that historically such movements have rarely

succeeded in bringing about long-term political change, because they are minorities in their societies and have proved

incapable of linking up and uniting with other social forces. All this is true as far as it goes, but there is a more

fundamental reason why today's protest movements are unlikely to challenge the status quo or bring about

substantive political changes.

"All gods dead"

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There is a hole at the heart of the new protest movements, as other observers have noted, pointing to the absence of a

clearly defined political purpose. We have the paradox of protests without politics in the classic sense of a contest of

ideas. Twentieth-century-style politicsa clash of ideas and a commitment to fight for themno longer exists in the

second decade of the 21st century. If we look at the demands of the protest movements around the world, this

becomes self-evident. Most of these movements centre on demands for dignity, inclusiveness, recognition, respect.

From Istanbul to Rio, London to New York and Madrid to Athens, protesters have self-consciously refused to engage

in a process of political clarificationin favour of just making an emotional statement (indignation, victimhood, leave

me alone, not in my name etc). Many protesters refuse to clarify what it is they are protesting against or fighting for,and even make a virtue of having nothing to say. The " silent man" in Taksim Square, Turkey, who stood without

moving or speaking for eight hours, is a fitting symbol of the new-age protests.

Behind this silence is a sense of impotence. Krastev cites a study of protest movements carried out by the London

School of Economics (LSE), which noted that many were not protesting against specific government policies as much

as expressing a general belief that powerful interests have captured democratic institutions and ordinary citizens are

powerless to bring about change. This sense of powerlessness, of being on the receiving end of changes wrought by

forces beyond the control of ordinary people, runs through many of the protest movements.

Even when protesters do put forward formal political demands, they tend to be accepting of the status quo. So

Bulgaria's protesters have demanded a reform of the electoral system and the country's institutions, an end to

corruption and greater transparency. These demands suggest an inability in this age of anti-politics to conceive of a

better alternative, no matter how disappointing the democratic fare on offer. The protest movements do not have any

sense of being agencies of social change; in fact, they are often anti-change and express regressive ideas about

growth and development.

The problem for the world's protesters is that they have been unable to come up with new ideas to fill the ideological

vacuum. Most of the new protest movements deliberately eschew ideology, even making a virtue of their lack of

political ideas. Most protesters might be able to identify what they are against, but not many can articulate clearly

what they are for, or have a plan of how they are going to achieve their goals.

Or does it explode?

The exception to the apolitical trend of modern-day protests appeared to be the Arab Spring movements, which

brought masses of people out on to the streets in a collective challenge to the anciens rgimes of the region. Once

people began to have a sense of their power to change things, as in Egypt a year or so ago, they became more

determined to fight for what they wanted. However, what started as a potentially transformative movement fordemocratic change has ended up endorsing the removal of the first democratically elected president by a

military coup.

Having failed to clarify their political objectives and organise themselves effectively, the original pro-democracy

protesters in Egypt found their aspirations for democracy blocked by the military. They went out on the streets again

to insist on an end to military rule and to fight for free elections, but they failed to rally the more conservative

elements in Egyptian society behind their vision of a more secular democratic future. When the first democratic

elections brought the better organised Islamists to power, the crowds came out on the streets again to demand their

removal. That a military coup to remove the elected president and his party from power can be celebrated by

protesters as a successeven as it entrenches nationwide divisions and threatens to precipitate civil warsuggests

that Egypt's protest movement suffers from the same flaws as others.

There are likely to be more outbreaks of unrest in coming weeks and months, and more governments are likely to fall,but the new-age protesters do not represent a serious threat to the status quo. Protest movements that do not

elucidate and clarify their objectives and do not build an organisation to fight for them invariably fizzle out. Further,

by disavowing politics, they allow the powers that be to reorganise while preserving the old political system. As one

political science professor in Cairo observed, the tamarrod movement will probably vanish just like other youth

coalitions "because they are about what they don't want, not about what they want". They are no match for Egypt's

military leaders, who will fight to defend their privileged position.

Economy

Forecast updates

June 7, 2013: Economic growth

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Faster growth driven by external sector

Event

Seasonally adjusted quarter-on-quarter growth in the first quarter of 2013 has been revised up from 0.5% to 0.7%, and

year-on-year growth has been revised up from 1.4% to 2.2%.

Analysis

Non-seasonally adjusted growth has been revised only marginally, from 2.1% to 2.2%, implying that the upward

revision largely affects the seasonal-adjustment coefficient for the number of working days, rather than the basic data.

The latest adjustment follows a series of revisions to estimates of GDP growth in 2012, and includes new revisions of

both quarter-on-quarter and year-on-year data for 2012 (although the full-year growth rate for 2012 is unchanged, at

0.7%). The frequent major revisions to GDP data suggest that the data will be revised again and raise doubts about

the methodology.

The data revisions indicate a faster recovery from recession than initially suggested. Romania recorded the third-

fastest year-on-year growth rate in the EU27 (where real GDP fell on average by 0.7%) in the first quarter of 2013,

following Latvia (5.6%) and Lithuania (4.1%). Romania's quarter-on-quarter growth was also the third-fastest in the

EU27 (where real GDP fell by 0.1% on average).

On the demand side, year-on-year growth was entirely stimulated by the external sector, with exports growing by

3.9%, making a contribution of 2 percentage points to growth. Imports fell by 1.7%, contributing 1 percentage point togrowth. Final consumption fell by 0.2% , making a negative contribution of 0.2 percentage points to growth. Similarly,

quarter-on-quarter growth (seasonally adjusted) was stimulated by the growth of exports, which grew by 7.4%,

whereas final consumption fell by 0.6% and gross capital formation by 1.3%.

Real GDP by expenditure, 1 Qtr 2013

Contribution to growth

% change, quarter on quarter a % change, year on year b year on year b

Final consumption -0.6 -0.2 -0.2

Household consumption c -0.5 -0.2 -0.2

Public consumption -1.6 -0.1 0.0

Gross capital formation -1.3 -2.8 -0.6Gross fixed capital formation -0.2 -0.7 -0.1

Exports 7.4 3.9 2.0

Imports 1.7 -1.7 1.0

GDP 0.7 2.2 2.2

aSeasonally adjusted. bUnadjusted. cIncluding education, health, cultural and recreational activities, and religious activities. All growth rates in

real terms.

On the supply side, year-on-year growth was driven by industrial value added, which grew by 2.6% year on year in

the first quarter, contributing 0.7 percentage points to growth; construction, which grew by 1.6% year on year,

contributing 0.1 percentage points to growth; and services, which contributed 1.4 percentage points. Agricultural

output fell by 0.8% year on year, making a negative contribution of 0.3 percentage points. Measured quarter on

quarter, industry grew by 1.3% and construction by 1.2%, whereas agriculture contracted by 0.5%.

Real GDP by sector, 1 Qtr 2013

% change, quarter on quarter a % change, year on year b Contribution to growth b

year on year

Agriculture -0.5 -0.8 -0.3

Industry 1.3 2.6 0.7

Construction 1.2 1.6 0.1

Non-financial services c 0.4 3.2 0.4

Information and telecommunications -2.4 8.8 0.3

Financial services 0.7 2.6 0.1

Real estate 1.3 2.6 0.2

Technical services -4.0 6.8 0.4

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Public services -0.6 0.2 0.0

Cultural and recreational activities 30.8 1.3 0.1

Gross value added 0.7 2.3 2.0

Net taxes -0.2 1.2 0.2

GDP 0.7 2.2 2.2

aSeasonally adjusted. bUnadjusted. cTrade, automotive repairs, hotels, restaurants. d Including administration, education, health and social

assistance. All growth rates in real terms.


The revised GDP data indicate that underlying growth is faster than initially indicated, largely driven by the external

sector, while domestic demand remains sluggish. If these growth rates are sustained in the second quarter, we are

likely to revise upward our real GDP growth forecast of 1.7% for 2013.

June 13, 2013: External sector

Export surge reduces trade deficit

Event

A surge in exports to the EU in April helped to reduce the merchandise trade deficit (fob:cif) in the first four months of2013 by 900m (US$1.2bn) compared with the year-earlier period, according to estimates from the National Statistical

Institute (INSSE).

Analysis

The euro value of total exports inside and outside the EU grew by 7.2% year on year in January-April, to 15.7bn,

while imports grew by 0.5%, to 17.3bn (cif). Exports to the EU27 grew by 6.2% in the first four months, to 11.1bn,

despite depressed markets, while imports from the EU grew by 5.3%, to 13.4bn (cif). A deficit in extra-EU trade of

400m in the first four months of 2012 was turned into a surplus of 600m in the first four months of 2013, with exports

growing by 9.7%, to 4.6bn, and imports falling by 13.8%, to 4bn (cif). Exports to the EU27 grew by 19.7% year on

year in April (compared with 2.2% in the first quarter), to 2.9bn, while imports grew by 14.6%, to 3.7bn. Imports from

outside the EU fell by 20.1% year on year in April, to 1bn, partly as a result of a 15% year on year fall in oil prices.

The surge in trade with the EU in April may reflect delays in recording imports at the end of March, which coincided

with the early (non-Orthodox) Easter. However, the growth of exports also coincided with a growth of gross industrial

output (seasonally adjusted) of 8.5% year on year in April, with manufacturing output growing by 15.6% and output

of motor vehicles rising by 23.8%.

Exports of machinery and transport equipment, including cars and car parts, reached 6.7bn in the first four months of

2013 exports of 1.8bn in April were equivalent to 43.6% of total exports. Data from the Association of Producers and

Importers of Automobiles (APIA) show that car exports rose by 29.3% year on year in volume terms in January-April,

to 124,837 units; production and assembly of automobiles increased by 42%, to 147,038 units. A Renault-owned

Romanian car producer, Dacia, reported sales growth of 18.1% on the French market in January-May, with sales of

37,179 units, accounting for 25% of French car sales by volume.

Impact on the forecastTrade data for the first four months provide grounds for optimism about economic growth in 2013, with exports

making the most significant contribution to real GDP growth in the first quarter.

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June 14, 2013: Inflation

Inflation stands still in May

Event

The consumer price index edged up by 0.2% month on month in May.

AnalysisA fourth consecutive month of modest monthly price increases left the annual inflation rate at 5.3% for a third

consecutive month in May. Inflation inched up by 0.2% compared with April, making this the fourth consecutive

month of historically slow rates of increase (following monthly increases of 0.2% in April, 0% in March and 0.3% in

February). Food prices increased by 0.8% compared with April, but non-food prices declined by 0.1%, while prices of

services stayed the same overall.

The inflation slowdown in recent months was helped by the appreciation of the leu against the euro in January-April,

although like others in the region the domestic currency became subject to depreciation pressures in May-June as a

result of developments on international financial markets and rising investor risk aversion. At its most recent board

meeting on May 2nd (the next board meeting is on July 1st) the National Bank of Romania (NBR, the central bank)

revised down its year-end inflation forecast for 2013 to 3.2%, from 3.5% previously, but revised up its 2014 forecast to

3.3%, from 3.2% previously. The bank has a multi-annual (2013-14) inflation target of 2.5% 1%, and expects inflationto fall within the variation band around the central target in the third quarter of 2013.

The NBR forecast assumes slower growth of Romania's main trade partners in 2013 and slower euro zone inflation, as

well as a continued fall in international oil prices amid weak global demand. The persistent negative output gap will

continue to have a disinflationary impact throughout 2013-14. The NBR's revised year-end forecast also takes account

of the new schedule for annual increases in administered prices for electricity and gas. A normal harvest in 2013 and

2014 should bring about a change in the dynamics of volatile food prices, which are likely to follow a downward path

starting from July.

Continued uncertainties related to the euro zone economic malaise and sovereign debt crisis could have a negative

impact on exchange-rate developments (as we have recently seen) and capital inflows, and a negative knock-on effect

on inflation. Other uncertainties relate to domestic policy issues, such as the timetable for structural reforms.


We will not be changing our year-end inflation forecast for 2013, of 3.4%, in response to the latest data release.

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June 14, 2013: Economic growth

Industry continues solid recovery in April

Event

Gross industrial production grew by 4% month on month in April (1.9% seasonally adjusted) and by 18.9% year on

year (8.5% seasonally adjusted).

Analysis

Growth in the first four months of 2013 is largely being driven by the robust recovery of industrial output, with gross

industrial output growing by 8.2% year on year in January-April (6.3% seasonally adjusted). Manufacturing output

grew by 9.9% year on year on a gross basis and by 8.4% year on year on a seasonally adjusted basis. Mining and

quarrying was up by 7.3% on a gross basis over the same period and by 5.9% on a seasonally adjusted basis. Output

from the extractive industries fell by 5.5% year on year on a seasonally adjusted basis and by 4.8% on a gross basis.

We estimate that gross industrial output grew by 2% quarter on quarter in the first quarter (seasonally adjusted), with

manufacturing output growing by 2.9% and output of the extractive industries falling by 1.7%.

The strong performance in April, when manufacturing output grew by 21.9% on a gross basis and 15.6% on a

seasonally adjusted basis, represents a significant advance on the first quarter, when industrial output grew by 4.7%

year on year on a gross basis and by 4.8% on a seasonally adjusted basis. The sharp improvement in industry in Aprilwas reflected in a surge in exports to the EU27, which increased by 19.7% year on year (compared with 2.2% in the

first quarter), to 2.9bn (US$3.9bn). Whereas industry appears to have entered a strong recovery phase, construction,

which fell by 6.6% year on year on a seasonally adjusted basis in January-April and by 6% on a gross basis,

continues to decline.


The April data show a sharp improvement on the first-quarter results, and we will be revising upwards our industry

forecast for 2013 during our next forecasting round.

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June 18, 2013: External sector

Current account records a surplus

Event

The current account registered a surplus of 55m in the first four months of 2013, compared with a deficit of 1.535bn

in the year-earlier period.

Analysis

A surge in exports helped to keep the current account in approximate balance in April and over the first four months.

The current-account deficit in April narrowed from 739m a year earlier to 14m, reflecting continued reduction in the

merchandise trade deficit, improved revenue from transport and a reduction in the deficit on incomes. According to

data from the National Bank of Romania (NBR, the central bank), the merchandise trade deficit narrowed from 1.93bn

in January-April 2012 to 957m (fob:fob) in the same period of this year in April alone, the deficit narrowed from

739m in 2012 to 405m in 2013, largely as a result of export growth and lower prices for imported energy and raw

materials.

Current account

( m)

2012 2013

Jan-Apr Apr Jan-Apr Apr

Current-account balance -1,535 -739 55 -14

Exports (fob) 14,610 3,537 15,665 4,086

Imports (fob) 16,541 4,276 16,622 4,491

Trade balance -1,931 -739 -957 -405

Services balance -131 -52 721 568

Incomes balance -874 -206 -674 -353

Current transfers balance 1,401 258 965 176

Sources: National Bank of Romania; Economist Intelligence Unit estimates from National Bank of Romania data.

A year-on-year growth in revenue from transport of 440m in April 2013 resulted in the surplus on transport risingfrom 209m to 677m in the first four months. Services other than transport and tourism moved from a deficit of 259m

to a surplus of 131m in the first four months. As a result, a deficit on services of 52m in April 2012 was turned into a

surplus of 568m in April 2013, while the deficit on services of 131m in January-April 2012 was turned into a surplus

of 721m this year.

The deficit on incomes for the first four months declined in year-on-year terms, as a result of a fall in foreign

companies' receipts from foreign direct investment (FDI) from 342m to 131m. However, the deficit on incomes rose

by 147m year on year in April alone. The surplus on current transfers fell from 1.4bn to 965m year on year in the

first four months as incomes from intergovernmental transfers (largely consisting of payments from the EU) fell from

1.2bn to 903m.

Net FDI inflows fell to 322m in the first four months from 494m in the year-earlier period, but showed a modest

annual improvement in April. Total external debt rose from 98.97bn to 100.93bn in the first four months of 2013.

Medium- and long-term debt rose from 78.72bn to 80.34bn over the same period, and short-term debt increased

marginally from 20.25bn to 20.59bn.


These data provide grounds for optimism that the current-account deficit will be contained at manageable levels, in

line with our forecast for 2013-17.

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June 27, 2013: Policy trends

IMF signs off stand-by agreement after final review

Event

On June 26th the IMF executive board completed the seventh and eighth reviews of Romania's economic performance

under its 2011-13 stand-by agreement programme.

Analysis

In a significant achievement for the Social Liberal Union (USL) government, the IMF board approved the completion

of Romania's two-year stand-by agreement, which only a few months ago had looked unlikely. This was the ninth

agreement between Romania and the IMF since the start of the post-communist transition 23 years ago. Of the eight

previous arrangements only two, in 2003 and in 2011, were completed. At the time the latest deal was signed, in

February 2011, we argued that it would be difficult to fulfil given the focus on public-sector reform and the looming

election in 2012. Its completion, albeit without fulfilment of all the structural reform targets, owes much to the

changeover of political power in 2012 and to the IMF's preparedness not to stick to the letter of the agreement given

the difficult international economic environment.

Over the past two years the economy has stabilised, inflation has moderated and the fiscal and current-account

balances have been greatly reduced. However, the structural reform agenda, including reform of the energy, transportand state-owned enterprise sectors, is nowhere near completed. Indeed, completion of the deal was delayed by three

months, from end-March to end-June, to allow the Romanian authorities to deliver on outstanding programme targets,

including the privatisation of the state-owned rail-freight company CFR Marfa and the launch of initial public

offerings (IPOs) in the energy sector. In the nick of time, the Ministry of Transport on June 20th selected private

railway operator Grup Feroviar Roman as the winner in the bidding for CFR Marfa. The company offered Lei905m

(US$264m) for a 51% stake and offered to invest about Lei900m in the unprofitable company. Meanwhile, the

procedures for the listing of Transgaz shares should be finalised by the end of July.

The Fund granted three waivers for the non-observance of performance criteria, in relation to net foreign assets of the

National Bank of Romania (NBR, the central bank); the general government budget balance; and central government

arrears. The authorities have undertaken to take corrective measures to meet the targets.

Impact on the forecastThe successful completion of the 2011-13 stand-by agreement does not alter our view that structural reforms in the

energy and transport sectors will continue to face difficulties and delays.

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July 4, 2013: Monetary policy outlook

Central bank begins monetary policy shift

Event

The board of the National Bank of Romania (NBR, the central bank) on July 1st undertook the first change to its

monetary policy rate since March 2012, when it reduced the rate by 0.25 percentage points, to 5%. Minimum reserve

requirements on both leu- and foreign-exchange-denominated liabilities of credit institutions were unchanged.

Analysis

The governor of the NBR, Mugur Isarescu, had indicated at the central bank's May board meeting that the NBR would

institute a round of interest-rate cuts, commencing in July. In May the NBR also reduced the corridor on its lending

and borrowing facilities around the monetary policy rate, from 4% to 3%. Domestic banks indicated that the

monetary policy rate could fall to 4.25% over the next 12 months, and that minimum reserve requirements could also be

reduced, but gave no indication of when they might reduce interest rates on credit facilities.

Historically, the NBR has favoured small-step changes in interest rates rather than single large changes. The

inflationary outlook has continued to improve, with the annualised CORE 2 inflation rate (which excludes administered

prices, volatile prices and alcohol and tobacco prices) falling from 3.3% at end-2012 to 2.7% at end-May, and the

harmonised index for consumer prices (HICP) falling from 4.6% at end-2012 to 4.4% at end-May.

The NBR is shifting its monetary focus away from controlling inflationary expectations, which it now considers to be

on a steady downward trend, towards encouraging economic recovery, given that actual growth in output remains

well below potential growth in output. Economic indicators provide conflicting messages for economic recovery, with

real GDP growing by 2.2% year on year in the first quarter of 2013, driven by export growth, which contributed to a

current-account surplus in the first four months. However, unemployment according to the International Labour

Organisation (ILO) definition is rising steadily (on a seasonally adjusted basis) from 6.7% in December 2012 to 7.5% in

May 2013the highest rate since the peak in March 2010.


The latest developments are in line with our forecast of further step-by-step rate cuts. As inflation falls towards the

NBR's inflation target, this will permit some monetary relaxation and stimulus for recovery.

Analysis

June 11, 2013

The long shadow of the black economy

Black market activity in Romania is equivalent to about one-third of the country's GDP, the second-highest level in

the EU (after Bulgaria), according to a study by the UK's Institute of Economic Affairs (IEA). The shadow economy in

Romania has some unique features compared with the economies of southern or western Europe, reflecting its

history of statehood, communist heritage, the transition from a command to a market economy and its slower

integration into the EU. While the negative costs of having such an extensive shadow economy are self-evident, the

most effective methods of tackling the problem are not.

Romania's black economy has shrunk by 4.4 percentage points over the past decade, according to the IEA report, to

the equivalent of 29.1% of national output. This figure makes Romania better placed than Bulgaria, where the shadow

economy is estimated to constitute the equivalent of 32% of GDP, but it is worse off compared with other countries in

east-central Europe such as Hungary and Slovakia. The study was carried out by authorities in the field, Friedrich

Schneider of Johannes Kepler University in Austria, and Colin Williams of the UK's Sheffield University. According

to earlier research by Professor Schneider, Romania's black economy was equivalent to 38% of GDP in the immediate

post-communist period in 1990-93. According to further research conducted by Mr Schneider, in mid-2002 the grey

economy in east-central Europe was equal to 30% of GDP on average, but in Romania it was equal to 50% of GDP.

Measurement problems

The report's authors acknowledge that measurement of the shadow economy is notoriously difficult as it demandsestimation of illicit economic activity that is purposely hidden from the official record. Surveys typically underestimate

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the size of the shadow economy, but the authors claim that econometric techniques can be used to obtain an

improved understanding of its size. Nevertheless, we should bear in mind that these estimates have a very wide

margin of error. Methodologies differ and are often disputed. Results can be very sensitive to small changes in data or

assumptions about the shadow economy determinants (the main drivers of the shadow economy, according to the

IEA, are tax and social security burdens; tax morale; the quality of state institutions; and labour market regulation).

Nevertheless, there is little doubt that the shadow economy is bigger in the Balkan countries than in central Europe or,

indeed, in developed OECD countries.

Main determinantsRomania's large black economy reflects the high burden of tax and social security payments; a poor regulatory

environment; a weak state administration; a high level of corruption which results in firms directing activities

underground to reduce their vulnerability to extortion by state officials; and the existence of a large rural population

which makes a relatively low tax contribution. These by now

eiu - romania - july2013

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