The accord has stabilized Romania’s financial system (IMF)

The Romanian financial system has stabilized, but the banking market is still fragile, while pressure on the exchange rate has dropped significantly, reads the daily Business Standard, on Wednesday, trying to cover the most important financial event of this month in Romania, the approval by the International Monetary Fund of the second tranche of the loan it promised to Romania.

But, the economy is too weak to sustain the strengthening of the currency, the daily goes on. The Romanian lending market is showing signs of rebounding. But, banks will not be able to do very much to relax real economy lending conditions.

This is how foreign analysts characterize Romania’s economy, as the International Monetary Fund (IMF) approved the second tranche of its loan, which will inject €1.85 billion into the state’s accounts.
‘The leu has stabilized due to the policies of BN R [National Bank of Romania].

The reduction of the minimum compulsory reserves has brought more liquidity into the market. This was a good decision, whose results we have seen. Of course, the money from the IMF has also been very important. We believe that the leu will remain stable in the period immediately ahead, but Romania’s economy is too weak to sustain the currency,’ said Gaelle Blanchard, Emerging Markets Economist of the London branch of Société Générale.

Neil Shearing, Emerging Markets Economist of Capital Economics in London, said that as soon as international market demand returns, the flexible exchange rate will offer the Romanian economy a competitive edge.

‘The leu has lost almost 15 percent since it reached a peak last year. We are expecting that once inflationary pressures abate, the central bank will relax the interest rate policy. We estimate that the key rate will drop to 6 percent.

The banking sector, which we qualify as being rather fragile, will not be able to do very much to relax real economy lending conditions. A lot of good things have happened in Romania, but we must continue to be realistic,’ Shearing added.

Marion Mühlberger, Economic Analyst for Eastern Europe of Deutsche Bank, believes that the main problem for Romania continues to be public sector salaries. The €1.85 billion will be divided in equal shares between BN R’s reserves and the State Treasury.

‘Against the backdrop of a significant deterioration in economic activity since the approval of the Stand-By Arrangement in May, policy implementation has been strong.

The deeper than expected economic downturn, however, requires a recalibration of policies so as to strike an appropriate balance between the short-term response to the crisis and the medium-term policy objectives,’ said John Lipsky, First Deputy Managing Director and Acting Chair of IMF’s Executive Board.

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