The forex reserves of central bank BNR are the leu’s main defense as external and internal tensions worsen, but the reserves fell below EUR33 million in June. Suspended president Traian Basescu said on Tuesday that the BNR no longer has the resources to intervene to stabilize the EUR/RON exchange rate and foreign reserves are approaching a minimum.
Representatives of the National Bank did not wish to comment on the statements made by suspended president Traian Basescu, although the statements were directly targeted at the institution.
The leu lost 4.3% against the euro in July and 7.4% since the beginning of the year, making loans in euros more expensive for three million Romanians and 150,000 companies with such loans, who have to pay more as the leu depreciates.
So Romanians’ disposable income will dwindle, and this will have negative effects on consumption, as well as on budget revenues from VAT and from excises.
The exchange rate is a delicate subject for Romanians, since over 60% of loans taken out by individuals and companies are in euros. The depreciation by 7.4% of the leu against the euro could boost the number of late payers by 5-10%, which would cause difficulties for banks, considering that 210,000 individual loan holders were behind on their payments at the end of May.
Non-performing loans leaped to around 16% in the first quarter of the year after in the last two quarters of 2011 they had shown signs of stabilizing at around 14% of the total.
The state budget is also affected by the leu’s depreciation, although consequences are not significant, and are mainly indirect.
“I think the main effect of the leu’s depreciation is indirect: most companies and individuals have loans in foreign currency and the debt service will rise following the depreciation of the leu. One of the consequences is the reduction of disposable income, of consumption and of direct taxes paid. If consumption dwindles, so do budget revenues from indirect taxes (VAT and excises,” says Dan Bucsa, chief economist of UniCredit Tiriac Bank.
He explains that using a depreciated leu in the calculation of excises would have a positive effect on excise revenues, but the effect would be much weaker than the indirect one mentioned above.
Excises, which bring around a quarter of state budget revenues and more than 10% of overall revenues collected by the Finance Ministry, are calculated at the exchange rate valid at the beginning of October 2011, of RON4.3001 to the euro, almost 8% lower than Tuesday’s exchange rate.
“The depreciation of the leu doesn’t have an effect on budget revenues. On the spending side the impact is small, non-significant. There can be effects in terms of spending for Romanian embassies in other countries, on spending for travelling abroad…,” explains Gheorghe Gherghina, secretary of state in charge of the budget.
Most analysts on the capital market believe the leu’s strong depreciation against the main currencies in the past few months will tend to have a negative impact on companies’ results as of the second quarter because most of them finance their activity with foreign currency. In mid year companies with loans in foreign currency will end up with financial losses after re-evaluating their debts in euros and in dollars taking into account the currencies’ appreciation against the leu.
In theory the depreciation of the Romanian currency should be advantageous for exports. But as the Romanian economy is significantly euroized, it cannot turn the leu’s depreciation to its advantage through higher exports. For most exporters, the rise of exports is cancelled out by the increase of production costs because a large part of Romanian exports are products that include an import component, and most companies have loans in euros.
Romanian employees of multinationals who negotiated their salaries in euros could collect lower net incomes because of the leu’s depreciation, considering that salary budgets are set at an exchange rate agreed at the beginning of the year. In some companies that pay wages in euros salaries are updated based on the exchange rate trend of the last three months, while in other multinationals wages in euros are updated only if there is a 5%, 10% or even 15% difference between the initial exchange rate and the current one.
(English version by Daniela Stoican)