“The FX is the most important monetary lever that the central bank has, as monetary policy is not as effective. With inflation expected to fall down to 3.8% by December, the central bank could allow the currency to weaken above the 4.30 level if the debt crisis escalates and other regional currencies continue to sell-off,” writes RBS in its “trip notes”.
As in other recent analyses, the analysts of the British bank note the stability of the leu over the past few months compared to the abrupt depreciations suffered both by the Polish zloty and the Hungarian forint, and expect the Romanian currency will perform better in the future as well, if pressure in the region continues.
Since the beginning of September, the leu has lost less than 2% against the euro, while the zloty and the forint lost around 9%. The zloty climbed to 4.5 to the euro, exceeding the leu/euro rate, and the depreciation of the Polish currency was so abrupt that the central bank and the largest Polish bank, which is state-run, had a concerted intervention on the market, managing to reverse the exchange rate trend.
RBS analysts cannot fully explain the stability of the leu. Of course, one cannot say the Romanian economy fares better than Poland’s economy, which did not even go into recession.
However, it becomes apparent once again that financial markets in an incipient stage of development, where foreign presence is implicitly quite limited due to the narrow range of instruments available for investment, are less affected by an international crisis.
For instance, in the case of Romania, foreigners hold leu-denominated government securities worth the equivalent of just EUR2.6 billion (18% of the overall volume of securities on the market), while in the case of Hungary, foreign investors control a EUR13 billion portfolio, i.e. around 35% of the forint-denominated government bonds in circulation.
RBS analysts say one cannot rule out a scenario of significant foreign investor withdrawals from the region by selling government bond holdings, which would lead to yield rises and depreciations of local currencies, but that under such circumstances, Romania would be less affected.
A depreciation of the leu by 5% against this year’s average exchange rate of 4.20 lei against the euro would mean one euro would be worth 4.4 lei. According to RBS, a 5% depreciation should not be considered a major shock for the Romanian economy if the situation in Europe further deteriorates.
RBS sees economic growth of 1.5% this year, which should increase to around 2%-2.5% in 2012, depending on external factors.
(English version by Daniela Stoican; Editing by Loredana Fratila-Cristescu)