Romania's leu needs a hand from the fiscal policy to fight the stronger euro

Publish date: 01-01-2009
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The coming year could bring an exchange rate of 4.2 lei over the euro in the first quarter in the worst-case scenario, as the national currency is weaker and is barely recovering from the blow of the economic crisis and the massive lending in foreign currency, analysts mull.

NewsIn polled several analysts who said the exchange rate should be propped up by fiscal measures to keep a good pace next year.

"The rate depends on the collaboration of the new government and the central lender, plus the accessibility of European funds and the international context as well which influences the players' views regarding the market," chief economist with Romania's largest bank by assets Banca Comerciala Romana (BCR), Lucian Anghel, said.

The newly-installed Cabinet should focus on harshening the fiscal policy and cut public spending in order to have a better control over the deficit and correct the current account gap, Anghel said. If the opposite happens, the exchange rate will stay above 4 for a while, he warned.

What's more, the peril lying ahead can take a hold of the currency if such fiscal signals are sent too late, chief economist with Raiffeisen Bank, Ionut Dumitru, said.

"The Cabinet should trim spending and resketch the budget," Dumitru urged, estimating the leu will stand at 4.2 over the euro in the first three months next year. Yet, by the end of 2009 the currency is likely to recover to 3.80 against the single European currency, he forecast.

The same value is gauged by the senior economist with ING Bank Romania, Nicolaie Alexandru-Chidesciuc, who said the leu will set off at 4.2 in the first quarter and then grow to 4.05 in the second quarter and close the year around 4.

The leu saw some happy moments this summer when it was strong, supported by the money sent home by Romanian workers abroad. But the financial crisis also affected them and many were laid off or earned less money in the fall months.

So, the only solution to underpin the weaker currency was the central lender's (BNR) often interventions on the market to prevent a steep fall of the leu over the euro.

BNR stepped in on the market in October, operating directly on the foreign exchange market, but dealers suspected it acted so several times, mostly indirectly.

As for the other currencies in the region, the most likely scenario for next year is that of a mixed evolution, Anghel said. Some countries belonging to the European bloc, eager to enter the Eurozone, could speed up pace on that road, which would definitely have a negative impact on their currencies, he explained.

A weaker leu unearths effects of excessive foreign currency lending

In the event the leu continues down the slope, the quality of loan portfolios of lenders will be affected. However, bankers deem measures to prevent such a thing from occurring have been taken.

NewsIn

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