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2. 2 CONTENTS  Recent Macroeconomic Developments………….....………… 3  Inflation Developments and Outlook ……..………….....…….. 7  Monetary Policy and Policy Mix …………………........……... 22  Real Sector Developments …………………….…………....... 28  External Sector ………………………………………….….…… 34  Exchange Rate Regime ………………………………………... 41  Fiscal Position ……………………………………………..….… 56  Monetary Data ………………………………………………....... 59  Financial System …………………………………….….…..….. 71  Euro Adoption ………………………………….…….…….….... 76  Economic Relations with the USA ………….……....….. 84

3. NATIONAL BANK OF ROMANIA 3 Recent Macroeconomic Developments

4. NATIONAL BANK OF ROMANIA 4  CPI inflation:  Annual rate: 6.57% (Dec. 2007/Dec. 2006) 7.26% (Jan. 2008 /Jan. 2007)  Average annual rate: 4.84% in 2007 5.11% :(Feb. 2007-Jan. 2008)/( Feb. 2006-Jan. 2007)  GDP growth: 2006: 7.9% based on increases in final consumption by 9.3% (private consumption grew 11.4%) and in investment by 19.3% Jan.-Sep. 2007: 5.8% based on increases in final consumption by 9.7% (private consumption grew 9.9%) and in investment by 25.3%  Current account deficit: 2006: EUR 10.2 bn., up 47.4% yoy; (10.4% of GDP); 86% covered by FDI 2007: EUR 16.9 bn., up 66.1% yoy; (14.4% of GDP); 42% covered by FDI  Foreign Direct Investment: 2006: EUR 8.7 bn., up 66.6% yoy 2007: EUR 7 bn., down 19% yoy Recent Macroeconomic Developments (1)

5. NATIONAL BANK OF ROMANIA 5  Fiscal balance (IMF Methodology): 2006: -1.5% of GDP 2007 (preliminary data): -2.4% of projected GDP  International reserves (foreign currency including gold): 2007: EUR 27.2 bn.; forex reserves EUR 25.3 bn. January 31, 2008: EUR 27.6 bn.; forex reserves EUR 25.6 bn. (covering about 4.8 months of prospective goods-and-services imports)  Financial intermediation 2007 forecast: 37.9% of GDP  Real growth of loans to the private sector 2007: 50.5% (RON: 30.6% foreign currency: 72.6%) Recent Macroeconomic Developments (2)

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7. 7 Inflation Developments and Outlook

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19. NATIONAL BANK OF ROMANIA 19  Wage increases overtaking productivity gains  Protraction or even worsening of the wage-productivity mismatch might lead to a dangerous wage-inflation spiral  Implementing a looser budget policy, specific to an election year  Failure to achieve the planned dynamics of budget revenues and making unforeseen public expenditures  Financing current expenditures to the detriment of capital expenditures  Faster deterioration of inflation expectations  Higher oil prices  Further increase in the oil price is a plausible scenario on international markets  Good agricultural year  Boosted by a favourable base effect, the larger-than-expected increase in agricultural output (the projection assumes an average agricultural year for 2008) would have a sizable impact on food prices  The Government’s commitment on:  Wage increases in line with productivity gains  Narrowing of the budget deficit  Improvement of public spending structure Potential Causes for Deviation of Inflation Rate from the Projected Path

20. NATIONAL BANK OF ROMANIA 20  Nature of risks and uncertainties associated with the current medium-term projection is generally similar to the previous one (November 2007) HOWEVER  In the event of upside risks to inflation materialising – especially if occurring simultaneously, this could have more severe consequences given the tensions in the international and domestic environments  The effects of the fiscal easing which in the previous years had allowed companies to absorb cost-related shocks without their having a major impact on inflation have faded  External financing will be available at higher costs, at least for a period of time Consequences of Risks Associated with the Projection Materialising

21. NATIONAL BANK OF ROMANIA 21  Even though annual inflation rate is projected to exceed the upper limit of the annual variation band until 2009 Q1, the NBR has chosen to tighten its monetary policy stance instead of revising inflation targets  Over a period marred by numerous uncertainties and exogenous shocks, it is of the essence to:  Bring inflation as fast as possible back to the announced medium-term disinflation trajectory  Ensure the sustainability of disinflation by avoiding a wider current account deficit Maintenance of Inflation Targets for 2008 and 2009

22. NATIONAL BANK OF ROMANIA 22 Monetary Policy and Policy Mix

23. NATIONAL BANK OF ROMANIA 23 Decisions of the NBR Board  To raise the monetary policy rate three times in the last 4 months (by 0.5 pp in November 2007, by 0.5 pp in January 2008, and by 1 pp in February 2008) to 9.0 percent p.a., from 7.0 percent  Proactive measures substantiated by: –worsening of the short-term inflation outlook –need for efficient anchoring of inflation expectations –boost in saving by ensuring a real positive interest rate, considering the need to reduce the savings/investment imbalance, aimed at correcting the external deficit  To continue to pursue a firm management of money market liquidity via open-market operations  Ensure efficient transmission of the monetary policy signal  Contain the volatility of short-term money market rates  To adopt additional prudential measures, including higher provisioning for foreign exchange-denominated loans to unhedged borrowers  To leave unchanged the existing minimum reserve requirement ratios on both RON- and foreign currency-denominated liabilities of credit institutions

24. NATIONAL BANK OF ROMANIA 24  Separate recognition of the currency risk effects assumed by borrowers, natural entities, through additional provisioning of foreign currency-denominated loans to unhedged borrowers (individuals who do not earn incomes in the loan denomination currency)  Lenders must submit to the NBR their amended internal lending norms, within 30 days from publication of the new provisions in the Official Gazette, so that they comply with the recently adopted requirements Prudential Measures Adopted in the NBR Board Meeting of February 2008

25. NATIONAL BANK OF ROMANIA 25  The economic policy mix is more important than any of its components   A restrictive monetary policy can offset only partly the lack of support from budget and fiscal policies and income policy in attaining the price stability objective:  Usually, over the short term  By taking the risk of persistent distortions, whose subsequent correction by the authorities is costly and lengthy, a spontaneous correction could be massive and disorderly   The outcome is suboptimal in terms of real convergence in the medium and long term Economic Policy Mix and Macro-stability (1)

26. NATIONAL BANK OF ROMANIA 26 Economic Policy Mix and Macro-stability (2) The economic policy mix needs to be reconsidered all the more so as:  Turbulence on world markets is persistent  The increasing international prices of agri-food items, energy and gold fuelled inflation  Romania’s external deficit has widened to unsustainable levels  need for gradual correction (to avoid disorderly correction)  Domestic currency appreciation is unlikely to be a major contributor to disinflation  Wage pressures will remain high in the context of EU integration

27. NATIONAL BANK OF ROMANIA 27 Optimal Economic Policy Mix  Continuation of structural reforms so as to boost the growth of productivity and external competitiveness of Romanian products  High monetary policy restrictiveness  Tighter-than-expected fiscal policy, likely to help narrowing macroeconomic imbalances  Containment of public spending growth and its channelling mainly towards public investment meant to foster the production potential of the economy  Improved budget planning by approving multiannual budgets and ensuring a uniform and predictable budget execution  An income policy matching productivity gains

28. NATIONAL BANK OF ROMANIA 28 Real Sector Developments

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34. NATIONAL BANK OF ROMANIA 34 External Sector

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41. NATIONAL BANK OF ROMANIA 41 Exchange Rate Regime

42. NATIONAL BANK OF ROMANIA 42 Liberalization of International Flows  1998: Current account operations (Art. VIII of IMF Articles of Agreement)  1999: Medium- and long-term capital inflows  2001-2002: Capital flows with low impact on the balance of payments  2003-2004: Capital flows with significant impact on the real sector  2005-2006: Capital flows with significant impact on the balance of payments  September 2006: Full convertibility of the national currency

43. NATIONAL BANK OF ROMANIA 43 Exchange Rate: implications of full convertibility  Full convertibility of the RON renders monetary policy conduct difficult  Massive inflows of speculative capital put downward pressure on the exchange rate of the RON Support disinflation in the short term BUT Imply risks to financial stability  great likelihood of a reversal in speculative flows  keener interest in forex borrowings  increase in external indebtedness of domestic companies, particularly in the short term  currency risk overexposure Foster excess demand

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47. NATIONAL BANK OF ROMANIA 47 Exchange Rate – Recent Developments and Outlook  The nominal appreciation trend manifest over the past three years came to a halt  The RON exchange rate reverted to a trajectory compatible with macroeconomic fundamentals, following the overappreciation at mid-2007  The correction was faster and larger due to the increased risk aversion of investors, caused by the US sub-prime mortgage crisis  In spite of the unfavourable short-term impact on inflation, exchange rate flexibility is an advantage, as it:  Allows the avoidance of excessive accumulation of macroeconomic imbalances which may generate crises  Operates as a self-correcting mechanism of current imbalances, alleviating the impact of external shocks  Return to a nominal appreciation trend is sustainable only in the context of productivity gains able of improving external competitiveness

48. NATIONAL BANK OF ROMANIA 48 Daily Nominal Exchange Rates (local currency/EUR) Source: Eurostat, National Bank of Romania

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53. NATIONAL BANK OF ROMANIA 53 Source: Eurostat, National Bank of Romania Daily Nominal Exchange Rates (local currency/EUR)

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56. NATIONAL BANK OF ROMANIA 56 Fiscal Position

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59. NATIONAL BANK OF ROMANIA 59 Monetary Data

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71. NATIONAL BANK OF ROMANIA 71 Financial System

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73. NATIONAL BANK OF ROMANIA 73 share in total banks (%); December 2007 Total assets Non- govt. credit Non- bank clients' deposits Banks with majority foreign capital 87.388.283.3 Banks with majority domestic private capital 7.88.210.6 Banks with majority domestic state-owned capital 4.93.66.2

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76. NATIONAL BANK OF ROMANIA 76 Euro Adoption

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80. NATIONAL BANK OF ROMANIA 80 Post-Accession Period: Challenges to Continuation of Disinflation  Pressures exerted by movements in relative prices  Further adjustments of administered prices (especially energy price)  Still strong domestic demand  External shocks (increases in oil and commodity prices on external markets)

81. NATIONAL BANK OF ROMANIA 81  1. Prior to ERM II entry  Consolidation of low inflation (sustainable disinflation)  Establishment of domestic market for long-term capital and interest rate convergence  Relative stability of the RON exchange rate (amid full convertibility) around the long-term equilibrium level (sustainable exchange rate)  Fostering of structural reforms Euro Adoption (1)

82. NATIONAL BANK OF ROMANIA 82  2. Timing of ERM II entry is set for 2012:  In order to ensure a period needed to: –fulfill nominal convergence criteria –achieve substantial progress in real convergence  3. Euro zone entry expected for 2014 Euro Adoption (2)

83. NATIONAL BANK OF ROMANIA 83  Inflation targeting strategy will be kept in place until ERM II entry at least  Cohabitation between inflation targeting and an explicit exchange rate target is challenging  Inflation targeting ensures gradual achievement of the Maastricht criteria and is supportive of real convergence ERM II Entry and Inflation Targeting

84. NATIONAL BANK OF ROMANIA 84 Economic Relations with the USA

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