The leu has lost 1.4% in the past ten days, which is quite significant, considering leu interest rates stand at 2% to 4% per annum.
The Bucharest Stock Exchange, with its BET index of the main ten stocks, lost 1% last week and saw a further 0.1% decline on Monday.
Renewed tensions in Ukraine, and especially of those between Russia and the West after the pro-Russian separatists in the east of the country shot down a Malaysia Airlines aircraft on Thursday, come on top of a decline in the risk appetite of foreign investors for the markets in the region that had begun early last week.
Analysts say that due to the latest developments the 4.45 lei to one euro threshold can no longer be avoided but expect things to stabilize above this level. Euro had not gone beyond 4.45 lei since April 30. Romania’s central bank BNR announced a 4.4488 lei to one euro exchange rate, almost RON0.01 above the Friday level but the rate dropped to less than that by the end of the trading session on Monday.
“The exchange rate has been fluctuating around RON4.45 to one euro, which disproves our previous idea that the leu will reach 4.35 units to the euro before it reaches 4.45 units to the euro,” says Vlad Muscalu, ING Bank chief economist.
“Still, on short term we can see the leu has not significantly overshot that mark, once having gone over it and we expect a certain stability over the coming sessions.”
The leu had reached 4.38 units to the euro at the beginning of June but unexpectedly lost ground last week following regional tension caused by a bank crisis in Bulgaria, where the fourth largest bank went under, which led to the weakening of the other currencies in the region, such as the zloty and the forint.
Even though the stock market lost almost 1% in the last two sessions, analysts blame the decline in traded volume more on the fact that most investors are on holiday in July rather than on the Ukraine conflict. The Bucharest Stock Exchange posted 0.7% decline on Friday, July 18, when investors could react to the news about the Malaysian Airlines aircraft crash. Monday’s session ended indecisively, with an about 0.1% decline.
Liquidity suffered the most, with traded value dropping to a low of 11.5 million lei (EUR2.6 million) on Friday, four times less than in the previous session.
Romania is directly connected with Ukraine in terms of economy, as well as with Russia, which is supporting the separatists in eastern Ukraine and risks starting a new ‘cold war’ with the US and Western Europe.
Russia dominates in its trade with Romania, exporting twice more than it imports. A major component in this trade is energy, be it natural gas, gas or diesel oil. Still Russian natural gas is becoming less and less important for Romania, having dropped from about 25% in the country’s consumption in 2012 to about 10% this year.
Lukoil, Russia’s second largest oil company, has a refinery in Ploiesti and more than 300 gas stations in Romania. Gazprom, the largest natural gas producer in Russia and in the world, owns 15 gas stations in Romania via Serbian group NIS.
On the other hand, Romania dominates in its trade with Ukraine, even though trade between the two countries is rather low. Romania’s exports to Ukraine in 2012 were ten times lower than those to Germany, its biggest export market.
While the capital and forex markets were quick to react to the crisis in the region, interests and government paper yields were not. The interbank rates relevant for leu loan costs remained constant at about 2% per annum over the past few days, while the Finance Ministry continued to borrow cheaper via government paper issues.
Analysts believe that, despite the geopolitical turmoil, the reaction of the markets might be limited, given the positive investor expectations about the economic trend. Romania’s economy grew by 3.8 % in the first quarter and could continue to perform well by yearend, partly helped by the bumper crops.
There are, however, expectations for the government paper yield to go up by yearend, but not necessarily because of the conflict in the region.
“The yields of the government paper will mainly be influenced by the domestic political and fiscal risks. We are seeing higher yields for the end of the year considering the upcoming presidential elections and the new government rhetoric in its relations with the IMF,” BCR analysts comment. They see the leu at 4.45 units to the euro at the end of December.
(English version by Loredana Fratila-Cristescu)