The leu rose by more than 2% against end-December levels. The zloty lost 1.5%, while the forint dropped 5.4%, while the Czech koruna was the most stable currency in the region, losing only 0.6% since the end of 2013.
“For a long while Romania looked better in terms of macroeconomic performance than the other countries in the region: it ended last year with the highest economic growth of the EU and things appeared to continue along the same lines after the first quarter,” says Mihai Patrulescu, senior economist of UniCredit Tiriac.
“Things changed in the second quarter but until then we’d looked very good. Financing sources were very good.”
He means the inflows of EU funds and the portfolio investments (inflows of foreign capital on the government paper market). Non-resident investments on the leu-denominated government paper market stood at more than 20 billion lei (EUR4.5 billion) at the end of June, or more than one fifth of the value of such instruments.
The capital inflows on the leu-denominated government securities market, which became attractive to foreign investors once JP Morgan and Barclays included a number of bond issues in their emerging market indicators, also influenced Romania’s forex market.
Reliance on foreign capital made the leu vulnerable at certain times of tension, when non-residents’ appetite for emerging market assets declined and they even sold their portfolios.
The leu had fallen towards 4.45 to the euro in mid-July and the first part of August, due to mounting tensions in Ukraine.
The past two weeks, however, showed a fast-paced appreciation of the leu, which gained 1% against the euro, reaching 4.3937 on Monday, according to the official exchange rate announced by Romania’s central bank. This is the first time in almost a month when the leu traded below 4.4 to the euro.
Central bank governor Mugur Isarescu has recently said that capital inflows were ‘surprising’ given the situation in Ukraine. Such inflows not only helped the leu up, but also boosted the foreign currency reserve of the central bank by two billion euros. The central bank intervened on the market to contain the leu appreciation by buying euros, hence the rise in foreign currency reserve. The move was necessary in order to not affect exports, the economy’s main growth driver.
Even though a 2% to 3% leu gain may seem insignificant, it has to be put in context with inflation and interest rates, which are now at their all-time lows.
Despite the exchange rate dropping to less than 4.4 to the euro at the end of last week, leu’s appreciation potential over the coming period is limited, analysts say.
“While trading on Friday seemed influenced by the news of the entry of the Russian convoy in Ukraine, the weekend did not bring any alarming news about it, it appears that the leu will likely continue to follow a slight upward trend,” says Vlad Muscalu, ING Bank’s chief economist.
Moreover, most bank analysts’ forecasts indicate a leu level at 4.5 rather than less than 4.4. Raiffeisen yearend forecast is 4.45 per euro, the same as UniCredit Tiriac’s.
“I think we’ll see a slight depreciation by the end of the year. The current account deficit is slightly higher than expected and the inflows of EU funds have slowed down. What can affect us in the region is the situation in Ukraine,” said UniCredit’s Mihai Patrulescu.
The analysts of BCR, the largest bank in Romania by assets, are even more pessimistic, seeing the leu at 4.5 to the euro. What should be noted, though, is that none of the forecasts is much higher than the 2013 yearend level of 4.48 to the euro.
(English version by Loredana Fratila-Cristescu)