Pressure of financial crisis over the national currency

The dramatic meltdown of the national currency down to nearly 4 lei/euro, spread concerns among managers of Romanian companies, especially those with import activities, but also among Romanians who have contracted loans in euro, as the burden of their loans increased.

The response of companies and population to currency exchange bounces, it is highly sensitive. Will the exchange rate near to 4 lei/euro threshold or will it go down? National currency closed yesterday’s inter-bank market at 3.7110 – 3.7145/euro.

“Volatility of the currency exchange rate after august 2007 rose significantly. If we consider a variation band in this period, at an average depreciation trend of 3.8 lei/euro, the upper threshold is at 4 lei/euro level. As a result, reaching this level is not excluded, but we expect this to happen in case of events likely to lay short-term pressure on national currency,” said Rozalia Pal (photo) senior economist at UniCredit Bank Romania.

The small scale of the currency market in Romania compared to other emerging markets in the region will make the financial crisis the birth pains of exchange rate, the domestic currency market remaining exposed to speculations of large international players, specialists say.

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As foreign cash inflows (foreign direct investments, short-term investments on equity market or monetary market, foreign debts) are slowing down or even shrinking, the currency exchange rate is strongly shook up.

“Current account deficit must be covered from the foreign investments (foreign investments or external debts) and therefore, the financial crisis together with liquidity drought and risk appetite affect us by lessening the funds directed towards Romania, and the meltdown of the national currency is the first signal of constraint”, said Pal.

Even if specialists see no steeper shocks over the currency exchange, the effects of the crisis will take shape in case Romania. “The negative effect will surely be inevitable in the upcoming period, and will manifest through a major reduction of investments pace and of consumption”, Pal explained.

“Even it there will be intervals of setback of the national currency, I don’t think it will lag too much at 4 lei/euro, and will come back to 3.6 threshold, on hopes of NBR’s rescue plan”, said Florin Eugen Sinca analysts at Banca Comerciala Romana.

Apart from the international financial crisis, the leu has to take the pressure sputtered by Romania’s current account deficit.