Will BNR allow the leu to tumble to an all-time low?

The country’s currency is quoted by the central bank at RON 4.1385/€1, close to its all-time low against the euro, registered on 6 January 2004, of RON 4.1438/€1. The leu exceeded that historic low yesterday on the interbank market, at RON 4.18/€1.

“What BNR can do is to avoid a sharp depreciation of the leu considering the negative feeling present on regional markets. We can expect the leu to recover in the coming weeks, even without BNR’s intervention. It will probably appreciate around RON 4/€1,” Ionut Dumitru, Chief Analyst of Raiffeisen Bank, told Business Standard.

Debtors in euro, companies which did not sign futures contracts to protect their business against exchange rate fluctuations, and which drafted their budgets based on a RON 3.6/€1 exchange rate, are now facing problems.

Radu George, General Manager of the Fildas drug distributor, said he has no special strategy to protect his business against the effects of the crisis. However, he plans to negotiate with the Ministry of Health the recalculation of the price of medications, fixed by the authorities.

The depreciation of the leu and higher interest rates, especially on lei-denominated loans, are expected to raise personal and company arrears above the €1 billion threshold, most likely in this year’s first quarter. Arrears on individual and corporate loans rose €58 million in November alone, up to €740 mln. The ratio of arrears in terms of total volume of granted loans amounted to 1.42 percent.

Lest it should intensify the fluctuation of the exchange rate, BNR decided, in its first session of 2009, to maintain the benchmark rate at 10.25 percent and not to modify the Cash Reserve Ratio (CRR). A lower key rate would have brought about a drop in the quest for the national currency, considering that investors are presently cautious, while a lower CRR would have raised market liquidity. Both the central bank and the government forecast an average exchange rate of RON 4/€1 in 2009, while foreign investors could change their minds if Romania’s government decides to narrow deficits.

“I think the ball is in the government’s court. It should begin cutting expenses as much as possible, and initiate talks with international investors, to convince these, based on a concrete plan, what it intends to do,” Lucian Anghel, Chief Economist of Banca Comerciala Romana, told Business Standard.

Romania began the year with a budget deficit computed based on European standards above five percent of gross domestic product (GDP), although the Maastricht convergence criteria admit a ceiling of three percent, leading to an inevitable correction of the foreign deficit.

‘We can expect the leu to recover in the coming weeks, even without BNR’s intervention. It will probably appreciate around RON 4/€1' Ionut Dumitru Chief Analyst, Raiffeisen Bank