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Isarescu: Current international crisis to change the world, Romania might avoid effects

The national currency depreciated strongly on Friday, the BNR reference rate being EUR 3.8720 for 1 RON, the highest level since 2005.

The current financial crisis experienced by the United States of America is a crisis that will completely change the world, as the Governor of National Bank of Romania, Mugur Isarescu, said, specifying that the financial crisis was experienced strongest in the capital market, where "Bucharest stock exchange collapsed".

The official of the Central bank admits that there are several risks for the small countries. "Yet, we have several prerequisites to escape the crisis", Isarescu indicated, who participated on Friday in the session "EUR adopting strategy and the world financial crisis", organized by the Romanian Academy, Agerpres informs. He explained that Romania had several adjustment tools, making a comparison with the countries which have a fix rate. Yet, Isarescu reiterated that in the absence of a proper policy mix, Romania will be unable to have a balanced growth for which two other prerequisites are needed, which are the proper absorption of the European funds and a better flexibility of the economic system.

He also explained that the lending institutions from Romania do not have exposures on those financial products that have induced these turbulences (‘under-prime' instruments). This is mainly due to the return rate provided by the ample interest margins granted in the internal market, as well as due to the rapid lending expansion through traditional banking loans. Secondly, the large majority of the banks active in Romania, including those with foreign capital, are legal entities subject to authorization, regulation and prudential surveillance by the National Bank. These banks as, in fact, the subsidiaries of foreign banks based in other countries of the EU, are subject to Basel II prudential and capitalization standards. Thirdly, some regulations of the National Bank have been often more restrictive than those provided by Basel II standards. More concrete, the requirements regarding the starting capital for the authorization of a lending institution in Romania are double as to the minimal level required by the EU regulations", the Governor assured. The decrease of the competitiveness of the Romanian products following the rapid advance of salaries and productivity will undoubtedly entail a worsening in the trade balance, and eventually, the depreciation of the foreign exchange rate, Isarescu added.

The stability of the rate, a key objective for joining the EUR zone

Over the past years, the improvement of the performances of the Romanian economy has enabled a significant mitigation of the rate fluctuations, as against one decade ago. The head of the central bank specified that a faster advance of salaries in relation to labour productivity would not result in a higher living standard, but on the contrary, in a lower one, since the gap between the two core indicators reflects sooner or later in the boom of prices, national currency depreciation, foreign indebtedness.

All these have a negative influence on investments, thus, putting on hold, instead of hastening, the real convergence of the economy, Isarescu explained. "The foreign exchange rate adopted by Romania, which is flexible rate, with rare interventions of the National Bank into the foreign exchange market, has been useful for the Romanian economy. Even the over-appreciation interval in the first part of 2007, due to the massive foreign inflows after the accession into the EU, was adjusted by the autonomous movements of the foreign exchange market.

We may say that there are no significant pressure factors currently, on the exchange rate, towards depreciation or appreciation, even if the crisis in the international financial market generates movements into a direction or another, temporarily. Yet, the balance in the foreign exchange market has been achieved by means of a policy mix characterized by a restrictive monetary policy, with high interest rates, a tax policy insufficiently strict and still subject to pressures for having public expenditures raised concomitantly with the diminishing revenues, whereas salary raises have obviously outnumbered the productivity gains. This mix is not sustainable. On long term, one cannot speak about foreign exchange balance considering the above context, even if on short term, the high interest level may compensate the outcomes of the other policies", the Governor indicated. On Friday, the national currency depreciated strongly, BNR displaying a reference rate of RON 3.8720 for EUR 1, which is by RON 0.011 more than during the previous day. Thus, RON lost 3 per cent following that EUR 1 was quoted at RON 3.7603 one day before. RON accelerated its depreciation until the end of the Friday session, the rate advancing to almost RON 3.9200 for EUR 1.

The rate announced by BNR on Friday is the highest in the past 45 months. A higher value for the exchange rate was announced on January 7, 2005, when EUR 1 was quoted at RON 3.880. As against USD, the reference rate indicates a depreciation by almost RON 0.09 for the national currency, down to RON 2.7912 for 1 USD, from RON 2.7017 for USD 1 on Thursday. Yet, BNR official continues to advice on savings in the national currency.

"Do not ever hope that a governor, no matter who he or she is, will advise you to save in anything else than the national currency", Isarescu concluded.

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Tags: exchange market which foreign depreciation financial friday world crisis romania national isarescu currency bnr

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