Romanian leu likely to depreciate

The leu/euro quotation trend turned around in the first trading day, dropping below the RON 3.6/euro threshold. The aversion of investors for risk lead to increased caution on emerging markets.

“As long as international markets will be frought by uncertainty we do not expect the leu to bounce back any time soon to its July quotations. The risk of a new leu depreciation is more real and must not be ignored,” said Raiffeisen analysts. Players on the market have to bet their money on the depreciation of the leu. One of the indicators considered by investors when estimating the leu’s exchange rate is the current account deficit, which rose to a worrisome level of 13 percent of GDP in the first half of 2007.

The leu’s lack of appreciation will also lead to lower efficiency in terms of sustaining the disinflation process. Raiffeisen Bank analysts estimate that the annual inflation rate may exceed 4.5 percent in the coming months, especially due to extended drought which increased prices of foodstuffs.

In order for the inflation rate to drop the government should maintain the current level of administered prices. But significant rises in heating and electricity prices have already been announced.

Non-governmental loans continue to increase very rapidly. The growth rate of foreign currency loans has accelerated in the past few months, exceeding lei-denominated loans. However, statistics are not accurate, since many banks have transferred their loan portfolios abroad. To stop the expansion of loans, the National Bank of Romania (BNR) has set high levels of compulsory minimum reserves, which are not likely to be reduced in the near future.

The good news is that labor productivity will increase by 10.6 percent year-on-year in the first nine months of 2007, due to a 4 percent drop in personnel. Net salaries increased by 22.5 percent in nominal terms in June 2007 year-on-year.

Production prices registered a 7.53 percent annual increase in Q2 2007, compared to the 8.46 percent increase in Q1 2007. A more expensive work force will lead to a reorientation toward sectors generating higher added value per product unit.