Financial market awaiting leu strengthening

Financial analysts are saying that there is no excluding the possibility of the local currency, the leu (RON), going down to less than four units to the single European currency, following the Thursday’s statement by Governor of the National Bank of Romania (BNR) Mugur Isarescu that the pressure peak on the leu has passed with the first 5 billion euros of an International Monetary Fund (IMF) loan having entered the BNR accounts for defending the leu, and with BNR having cut its monetary policy rate by 0.5 percentage point.

If the euro fell to below the RON4 threshold, euro debtors will be at an advantage, and so will be those who borrowed in RON, because interest rates on RON loans are expected to decline at least 0.5-percentage point, daily Business standard remarks. Some banks did not wait for the Thursday’s cut in the monetary policy rate and had already cut interest on deposits, including Banca Transilvania, OTP Bank and Alpha Bank.

Bolstered by the positive developments in the region, the leu appreciated 3.57 sub-units on Thursday, to RON 4.1281 to the euro, the lowest exchange rate in the past three weeks and three days, and the rate went down to RON 4.11 to the euro on the inter-bank markets.

‘There is no excluding the possibility of the rate going down to below RON4. In the short run, the leu could appreciate, but we are nonetheless reaffirming our estimate of a RON 4.7 to the euro rate for the end of the year,’ the paper quotes ING Bank Romania Senior Economist Vlad Muscalu as saying.

Financial analysts are arguing that the long-term strengthening of the leu is unsustainable. ‘This is rather a bounce back in optimism. What is certain is that we will witness cuts in interest rates on loans and deposits, particularly because many banks did not manage to continue lending because of the interest rates,’ says UniCredit Tiriac Bank Senior Economist Rozalia Pal.

The real economy is nonetheless giving some signs of a slight recovery, after a strong decline in the last quarter of 2008 and early 2009. Industrial business and orders are reported to have advanced in March after five months of consecutive declines, while trade stagnated after drastic falls. Loan applications also advanced, since banks made credit enquiries 26 percent more than in February, says Business standard.

‘This is a correction of an overblown pessimism. There are encouraging signals, which still have to be confirmed by a trend. The signals now indicate stagnation in worsening developments. These are some sparkles that have to be fuelled up, but BNR has not to be alone in sustaining them, and other should join,’ says BCR Chief Economist Lucian Anghel.

In the camp of business managers, the strong volatility of the leu in the last part of 2008 make business executives rule out a strengthening of the local currency.
‘I do not believe the RON exchange rate against the euro will go down below RON4, as I also believe things should not be forced.

The true value of the euro is somewhere in the RON 4.2-4.25 region and that is the level that will allow local exporters to weather the crisis. If the leu falls below this level, almost three quarters of Romania’s exporters will go bankrupt,’ businessman George Copos, the owner of the ANA group of companies, which includes Ana Imep, a business almost exclusively dependent on engine and electrical equipment exports, told Business standard on Thursday.

Copos also said he believes the Romanian economy is not ready yet to face competition, and that is why a strengthened leu will be the end of exporters. ‘If the decision of the BNR to cut its benchmark rate is not followed by relaxed crediting, that is boosted consumption, chances will be big that three quarters of the Romanian importers will wind up,’ Copos told the paper.

CEO Emanoil Viciu of the Teraplast of Bistrita maker of construction materials says that the exchange rate may be favourbale to the leu for some days. ‘Favourable developments are possible in the next three months, but the exchange rate should be somewhere in the region of RON 4.15-4.3 to the euro; any decline below RON4 would be accidental and last some days only,’ says Viciu.

The National Bank of Romania seems more optimistic, as on Thursday it adjusted slightly downward its year-end inflation projection from a previous 4.5 percent to 4.4 percent. At the same time, BNR downwardly adjusted its end-2010 inflation projection from 3.2 percent to 2.8 percent.

Although the adjustment in this year’s inflation projections is small, it does evidence the fundamentals of BNR’s reckonings, says the paper. As BNR Governor Isarescu explained, deflation has set in comfortably and will continue throughout 2009 and beyond in 2010.


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