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FORECAST – Romania's leu needs a hand from the fiscal policy to fight the stronger euro

The coming year could bring an exchange rate of 4.2 lei over the euro in the first quarter in the worst-case scenario, as the national currency is weaker and is barely recovering from the blow of the economic crisis and the massive lending in foreign currency, analysts mull. Several analysts said the exchange rate should be propped up by fiscal measures to keep a good pace next year.

"The rate depends on the collaboration of the new government and the central lender, plus the accessibility of European funds and the international context as well which influences the players' views regarding the market," chief economist with Romania's largest bank by assets Banca Comerciala Romana (BCR), Lucian Anghel, said.The newly-installed Cabinet should focus on harshening the fiscal policy and cut public spending in order to have a better control over the deficit and correct the current account gap, Anghel said. If the opposite happens, the exchange rate will stay above 4 for a while, he warned.

What's more, the peril lying ahead can take a hold of the currency if such fiscal signals are sent too late, chief economist with Raiffeisen Bank, Ionut Dumitru, said."The Cabinet should trim spending and resketch the budget," Dumitru urged, estimating the leu will stand at 4.2 over the euro in the first three months next year. Yet, by the end of 2009 the currency is likely to recover to 3.80 against the single European currency, he forecast.The same value is gauged by the senior economist with ING Bank Romania, Nicolaie Alexandru-Chidesciuc, who said the leu will set off at 4.2 in the first quarter and then grow to 4.05 in the second quarter and close the year around 4.The leu saw some happy moments this summer when it was strong, supported by the money sent home by Romanian workers abroad. But the financial crisis also affected them and many were laid off or earned less money in the fall months.

So, the only solution to underpin the weaker currency was the central lender's (BNR) often interventions on the market to prevent a steep fall of the leu over the euro.BNR stepped in on the market in October, operating directly on the foreign exchange market, but dealers suspected it acted so several times, mostly indirectly.As for the other currencies in the region, the most likely scenario for next year is that of a mixed evolution, Anghel said. Some countries belonging to the European bloc, eager to enter the Eurozone, could speed up pace on that road, which would definitely have a negative impact on their currencies, he explained.

A weaker leu unearths effects of excessive foreign currency lending In the event the leu continues down the slope, the quality of loan portfolios of lenders will be affected. However, bankers deem measures to prevent such a thing from occurring have been taken.

The leu's fall to 4.2-4.25 against the euro coupled with cheaper real estate guarantees for loans at Volksbank Romania could trigger a 50 percent rise of risk provisions and also allow a 25 percent advance in profit in 2008 over 2007, according to the bank's president, Gerald Schreiner.

Some 80 percent of credits are mortgage loans, he said. Banca Romaneasca deems the leu's drop will not lead to significant issues with paying back loans, but the bank has taken some measure just in case things go wrong, according to its head, Andreas Maragkoudakis. Also, the head of the oldest lender and the largest by network, state-owned CEC Bank, Radu Gratian Ghetea, said the leu's evolution will take a ride along the economic flow next year. OTP Bank president, Laszlo Diosi, deems the lender, though having prepared several possible scenarios for next year, excludes the leu's plunge to above 4 against the euro. The leu could camp next year around 3.60-3.90 over the euro, Diosi gauged.

Yet, if the leu goes deep in the woods above 4 over the euro, it enters a "risk zone", according to Dumitru, who believes banks will be hit by such a fall."Next year the pressure on provisions will add up owing to risks generated by the weak leu and the cheaper real estate projects," Dumitru said. Moreover, people who borrowed foreign currency will have a hard time paying back, he warned.

Romania's national currency slipped to a four-year low this week of 4 against the euro, losing some 10.3 percent throughout the year from an average reference quota of 3.3373 versus the euro in 2007.

Yet, the exchange rate's volatility reduced in 2008. The leu slumped in the first part of the year, losing some 16 percent while best quota for it was on August 7, of 3.4719 over the euro.

Sursa: http://www.actmedia.eu

Tags: currency romanias percent exchange euro fiscal cec otp bcr ing bnr