2 Noiembrie 2009
Where is the leu heading this year?
The euro is very likely to strengthen further versus the Romanian currency, up to 4.5 lei, according to the gloomiest projection of the analysts interviewed by Wall-Street. The political crisis coupled with a severe economic downturn, and the delay of structural reforms that Romania must put in place are the main drivers of the leu weakness, said the analysts who expect the domestic currency to start recouping losses as late as in 2010.
How much will a euro cost by the end of 2009?
ING Bank expects the EUR/RON to touch 4.5 by the end of the year, while Banca Comerciala Romana and UniCredit Tiriac Bank bet on an exchange rate of 4.3 lei/euro by the end of December. Raiffeisen Bank’s forecasts announced six months ago remained unchanged.
ING’s forecast is the most pessimistic, as it factors in the devaluation risk posed by possible disagreement between Romanian authorities and IMF on the SBA conditionality.
Citi predicts an exchange rate of 4.32 for the end of 2009, forecasts that have been recently revised upward from 4.1lei/euro. Citi said it also expected an active intervention of the central bank in the forex market in an effort to shield the domestic currency against the negative effects of the political crisis.
The official exchange rate posted yesterday by the National Bank of Romania broke through the 4.3lei/euro psychological barrier, climbing 0.2% from the previous session. The leu is thus at its weakest point in eight weeks and a half.
Economists expect no positive factors that could drive the leu back up versus its European peer for the end of 2009 and early 2009, as there is no economic background that could strengthen it.
The leu is at its lowest level since February 17, when the central bank posted an exchange rate of 4.3096lei/euro.
Why is the leu feeble?
Under these conditions, “a mild strengthening of the leu is expected for early 2010, after the required measures to meet the IMF conditionality are in place”, said Lucian Anghel, senior economist at Banca Comerciala Romana.
UniCredit Tiriac Bank’s senior economist Rozalia Pal shares the same opinion, saying the leu is likely to regain ground in early 2010, but uncertainties and devaluation pressures will persist through in early 2010.
“Devaluation pressures will persist both for the local currency and for its regional peers. Our projection is 4.3lei/euro for year-end, and we already taking into account a potential delay in the disbursement of the third tranche of the IMF aid package, and this is already factored in the depreciation pressures over the leu”, said Rozalia Pal.
Citi analysts expect a moderate appreciation of the leu in 2010 and say the important thing at the moment is the installation of a new government after the presidential elections, so as the IMF and European Commission to resume the agreement after a possible delay for the second assessment scheduled for December 2009.
The agreement with IMF must go back on the table. Making predictions on currency movements is nothing but a lottery
“If the International Monetary Fund puts off the disbursement of the third tranche of the loan is not a tragedy! It is clear that the aid deal with IMF must go back to the negotiating table because in December, almost all economic targets will be missed. The budget gap was contained within the target range set by the IMF, but will exceed 7.3% of GDP by the end of the year, because no cost-cutting measures have been put in place so far, and the authorities have run out of time”, said Ionut Dumitru.
After the Fund’s mission in August, the Romanian authorities and the International Monetary Fund agreed on a new budget gap target for this year of 7.3% of GDP (36.5 billion lei), an economic contraction of 8.5% and a GDP of 497.3 billion lei.
Romania has no chance of narrowing the budget gap to 5.3% by the end of next year without raising taxes, the economist continued, even though it would be the worst solution at hand.
“Furthermore, 2010 budget is another problem, but what budget are talking about if we don’t even have a government? The IMF aid deal has gone off track to a certain extent, and must be brought back to the negotiating table, and this puts us in a difficult position, because we failed to do our homeworks”, Raiffeisen’s senior economist said.