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Macroeconomic monthly newsletter Inflation in June remained flat June inflation remained flat at 0,3 percent m/m, taking

the y/y inflation to 9,7 percent, from 10 percent in May. Year to date CPI stands at 4,1 percent. This years inflation target has already been revised up by the central bank at 7.5 percent and there is a high probability that the yearend yoy inflation rate will be between 8 and 8.5 percent. The disinflation process will slow down on the medium term given the unavoidable pressures to increase the wages in the public sector and to spend more public money by increasing the budget deficit while the liberalization of the capital account would limit the tools available to the monetary policy. Forex reserves climbed to EUR 13,7 bn NBRs forex reserves reached EUR 13,7 bn, excluding gold, increasing by some 534.2 m, month on month. Hard currency purchases from the forex market, reserve management revenues and other inflows amounted to EUR 1.1 bn, with total outflows at around EUR 597,4 m, representing external debt payments, fees and commissions and other outflows. Industrial output increased by 4,8 percent y/y The industrial output rose in the first five month by some 4,8 percent yoy, data adjusted for the working days. Retail sales firmly in double digit growth Retail sales continued their strong growth, rising by some 19,2 percent yoy in May. The main factor of growth remains the sale of food products that increased by some 22,7 percent yoy, while nonfood product sales rose at a healthy pace of 16,9 percent y/y. This is the result mainly to the cut in the taxation rates and the increase in the disposable income. Lower income households preferred an increase in the food consumption while the higher income earners allocated the additional resources to saving or the acquisition of luxury cars. Private credit expanded further in May Private credit rose in May by 26 percent yoy in real terms, accelerating from last months 22.8 percent. The main driver remains the hard

currency denominated credit, which maintains a yoy growth rate above 30 percent while the weight in total credits remains marginally above 60 percent. RON denominated credit also accelerated in May, posting a 17.7 percent yoy growth in real terms, the highest rate this year to date. Hard currency deposits gained further ground in May In May household deposits remained rather flat mom in real terms, while yoy the growth rate stood at 23,9 percent. On the other hand hard currency deposits in RON equivalent rose by some 1,8 percent mom and 20.5 percent yoy. RON corporate deposits increased marginally in May by some 0,2 percent in real terms with the yoy growth figure reaching an impressive 73.6 percent in real terms. Meanwhile hard currency deposits increased for corporates by a strong 14,5 percent in RON equivalent, taking the yoy increase to a significant 97 percent. The drop in RON interest rates does not encourage the saving for households and corporates, currently real deposit rates being close to zero. Current account deficit is increasing Current account deficit up 77 percent in the first five month of 2005 compared to same period in the previous year. The main contributor to the current account deficit in the last several years was the nongovernmental sector deficit that rose from 0.8 percent of GDP in 2002 to 6,4 percent of GDP in 2004. As can be observed from the below table, despite the diminishing of the budget deficit from one year to the other, the current account deficit had a constant upward trend. 2002 Current account deficit (% of GDP) Nongovernmental sector deficit (% of GDP) Budget deficit (% of GDP) Source: NBR; own calculus 3.4 0,8 2,6 2003 6 3,7 1,1 2,3 2004 7.5 6,4

There is a consistent upward pressure on the nongovernmental sector deficit given the cut in taxation and the increase of the disposable income, the surge in nongovernmental credit and historical low interest rates. In this context, we expect current account deficit to amount to around 8,58,7 percent of GDP this year.