Where next for strong RON?

The Romanian currency has appreciated to its highest level since May last year. Chief economists are predicting it will reach 4.1 RON/EUR by the end of the year, and 4.05 RON/EUR at the end of 2012. Business Review asked the major banks on the local market what factors are influencing the local currency, what can be expected from the Central Bank and why the Swiss currency has gone wild and registered such large day-to-day variations.

Dana Verdes

The Romanian currency continued to appreciate last week against the euro, as the Romanian National Bank (BNR) announced an official rate of 4.17 RON/EUR, a level not seen since May last year. But with an eye on the political instability and international events that are leaving their mark on the foreign exchange rate, local economists are reluctant to predict that the RON’s appreciation will continue.

Dan Bucsa, chief economist at Bancpost, tells Business Review, “On the short run, the RON could slightly appreciate against the euro and the dollar, helped by investors’ appetite for risk, IMF support and higher interest rates than on EU emerging markets. I do not think it will go below 4.1 RON/EUR. In the second half of the year, it might reach over 4.2 RON/EUR.”

A more optimistic outlook comes from Banca Comerciala Romana economists. “Our exchange rate prognosis indicates a slight RON appreciation towards the level of 4.1 in December this year,” Florin Eugen Sinca, analyst with the macro and fixed income securities research team at the BCR strategy and market research department, tells BR. But it depends on the conditions, says the BCR representative. “We count on the continuation of the IMF and EU agreement which will consolidate foreign investors’ trust, on exports continuing their good performance seen so far this year and on the improvement of EU funds absorption.”

Meanwhile, Rozalia Pal, chief economist at UniCredit Tiriac Bank, predicts a stronger RON will prevail towards the end of next year. “According to current bank forecasts, we expect a slight depreciation of the RON against the euro by mid-year, followed by a new assessment, up to 4.2 RON/EUR at the end of the year. By the end of the year I do not expect to see 4 RON/EUR, but over the longer term we expect 4 RON/EUR. At the end of 2012, our forecast for the exchange rate is 4.05 RON/EUR,” said Pal.

Who wins from a stronger RON?

Economists say that a slender RON appreciation would benefit borrowers with debts in foreign currencies, and help reduce inflationary pressures. Moreover, sustainable RON appreciation, they add, can improve investor sentiment and confidence in the economic outlook. “The RON’s appreciation may have positive effects on the consumer price index, counterbalancing the effect of rising prices worldwide. In addition, encouraging optimism and accelerating consumption may favor economic recovery,” says Pal.

The appreciation of the national currency should reduce imported inflation, but this did not happen in January and February this year, which shows that import prices are still tight, despite reduced demand, says Bancpost’s chief economist.

“However, a stronger RON makes imports cheaper, which is good for importers’ incomes. Romanian exports will be less competitive if the RON strengthens. This was not seen in January 2011, when exports exceeded imports by EUR 91 million. This is the first monthly trade surplus in international goods trade that Romania has recorded since 2005. Export contracts are concluded for periods longer than one month and, therefore, a stronger RON could affect exporters’ external competitiveness from the second quarter of this year,” says Bucsa.

A note of caution

The Bancpost chief economist believes that if the RON comes down to 4 RON/EUR, such an appreciation will be long lasting. Yields are very attractive for Romanian financial investment (with high interest rates for both banking investments and government securities), but financial investors’ appetite for risk has been very volatile in recent years.

“Against a strong appreciation of the RON is the Central Bank’s reluctance to have a powerful RON, given the importance accorded to exporters in the process of getting the country out of recession, the depth of local markets, which are much less developed than other markets in the region, a poorer economic performance than countries in the region and the political and legal uncertainty,” says Bucsa.

As Rozalia Pal tells BR, “An improvement in the sovereign rating outlook would have a significant impact on the RON’s strength, encouraging appreciation.”

All eyes on the Central Bank

The UniCredit chief economist says, “The Central Bank will intervene on the foreign currency market especially in the event of excessive and rapid movements of the exchange rate. On the inflation front, we expect a change of attitude from the BNR, meaning a more restrictive monetary policy.”

Bucsa believes that the Central Bank has sufficient foreign reserves to influence exchange rate movements, if desired. “In recent years, the Central Bank pledged to promote exchange rate stability and if we look at the EUR-RON trajectory from January 2009 to March 2011, we can see that it was in the range of 4.1-4.3 RON/EUR for 80 percent of trading days,” says the Bancpost chief economist.

Why is the CHF sky-rocketing?

The Swiss currency (CHF) has hiked since the crisis started, registering large rate fluctuations from day to day. Economists say that the CHF has strengthened globally, not just in relation to the RON, with movement being determined by the investors’ risk appetite and interest rates.

“The appreciation of the CHF against the RON is a direct consequence of the Swiss currency’s value against the euro on the global markets. The fiscal problems some EU member countries are facing and the political turbulence in North Africa and the Middle East have decreased foreign investors’ confidence in the European currency and persuaded them to turn to the safety offered by the CHF,” says the BCR representative. “The country’s low level of public debt, the competitive structure of its exports and its good economic performance during the crisis have tilted the balance in favor of the Swiss currency on the foreign exchange markets.”

On top of that, Bucsa argues that the CHF is a currency to which international investors look in times of lower risk appetite (a refuge currency along with the USD and Japanese yen).

“Investors’ preference for the CHF is due to the high liquidity, strong economy and, especially, the prudent reforms implemented in the Swiss financial system, the most advanced in the world,” says Bucsa. As the European Central Bank (ECB) will probably increase interest rates from an estimated 1.00 to 1.75 percent, it remains to be seen how the major currencies will respond and how the RON will fare.

dana.verdes@business-review.ro

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