ING Bank analysts: The leu, likely to challenge 4.7units/euro level in Q3, 2009

“Understanding that capping the single European currency versus leu is too expensive regarding the economic growth, BNR enables the local currency to freefall, thus targeting a challenging depreciation in order to temper down the current account deficit. Hence, we have modified our forecasts regarding the top exchange rate, which we had previously set at 4.70 lei/euro in third quarter, with the possibility of actually exceeding this threshold”, reads the report drawn by senior economist at ING Bank Romania, Nicolae Chidesciuc.

ING analysts forecasted a top exchange rate of 4.20 lei/euro for this year.

The deepening recession in the developed economies should have exerted more pressure on the local currencies of emerging countries and especially on leu, and the negative expectations on the evolution of the Romanian economy – should contribute to this year’s local currency’s fall.

Moreover, the modification of BNR’s policy on the ‘protection’ of the national currency will enable leu to take a wide-margin depreciation. Central Bank might be needed to witness a sharp weakening of the national currency for this year, because it tries to slow down the deepening of the current account deficit, as the economic growth sees a fierce threat.

Furthermore, if BNR intervened constantly to sustain the local currency, it would fuel an excessive growth of interests in the inter-bank market, which would severely affect the Romanian economy.

A financial aid from IMF or EU would provide only temporary incentive for the leu

Given the fact that it is very probable for the liquidity demand coming from Ministry of Finance to keep on growing, a possible aid from International Monetary Fund or from European Union would only limit the fall of the leu, reads the report released by ING Bank Romania.

“The currency exchange rate would probably register a significant correction, if Romania called upon a financial aid to IMF or EU, as IMF will conduct a mission in Romania, later this month where the financial assistance may be one of the topics for debate. If we take for example the Hungarian forint, it is very likely for this news to lift the leu against euro for a short while. We expect the local currency to continue its downtrend, and we forecast a 4.50 lei/euro exchange rate at the end of first quarter”, reads ING report.

Due to the sharp depreciation of the leu, which is affecting the people’s purchase power, the volume of delinquent loans is prone to increase dramatically in the following 3-6 months, considering that over a half of the loans granted by population are in foreign currency.

Consumption-oriented business may be even more affected, and in the future the banks may experience problems due to massive depreciation of the leu.