Leu depreciation to lead to economic downfall

In these conditions, the National Bank of Romania (BNR) posted an exchange rate of RON 4.2684/€1 on Monday, 12 January, some 6 percent above the value of the national currency at the beginning of 2009. Moreover, the leu continued to depreciate on the foreign currency market, down to RON 4.32/€1, even after the central bank posted the benchmark exchange rate.

The foreign currency market is overcome by panic, which is also affecting individuals who have started to trade their lei for euro as a protection against the devaluation of the national currency. This situation is leading to further depreciation of the leu.

“Everybody is now buying euro. There is also a psychological effect which started when the exchange rate exceeded RON 4.3/€1. Some players may now be expecting the leu to depreciate to over RON 4.5/€1. Only BNR can intervene to strengthen the leu, but it has not yet done so,” said Ciprian Mihai, Head of Volksbank Romania’s Treasury Department. While Nicolaie-Alexandru Chidesciuc, Senior Economist of ING Bank Romania forecasts that the leu will maintain its downward trend and that we could witness a RON 4.7/€1 in September, Dragos Cabat, Managing Partner of the Financial View advisory company, said that the maximum value will be RON 4.3/€1.

Although forecasts by analysts vary, there is an almost unanimous agreement in terms of solutions to the problem. Most economists feel that the central bank should step in to support the national currency.

“A five percent weekly depreciation is not something the central bank can afford,” said Rozalia Pal, Senior Economist of UniCredit Tiriac Bank.

The depreciation of the national currency will severely affect companies, as their debts will skyrocket. “Having major debts is all right if your investments are profitable, because banks are not granting loans as easily as before. The problem is how you pay these back. I do not think we can continue to consider investments or attracting European funds in such conditions, but rather opportunities that must be seized,” Stefan Padure, Vice President of the Angst cold meats producer, told Business Standard.

Maria Grapini, President of the Federation of Employers in the Light Industry (FEPAIUS), said that the depreciation of the leu is a double-edged sword. “On the one hand, importers are at a disadvantage, because we have no raw materials in the country, and on the other hand, a weaker leu favors exporters. But even if we win on exports, we are still in the red, because costs are surging,” Grapini added.

The depreciation of the leu will also affect Romania’s agriculture. “We sell the wheat two to three months after the harvest, exporting this at an exchange rate of RON 3.2 to €1, and now we are buying equipment at an exchange rate of RON 4.2/€1. How could I have known that I should sell wheat now and have bought the equipment before,” said Adrian Porumboiu, President of the Racova Com Agro Pan Vaslui group, a major foodstuff producer in Romania.