The effects of the numerous rate swings this year were apparent in importers and exporters' balance sheets, in the depth of the current account deficit and all other macroeconomic indicators. One direct effect was apparent in the EUR 11 billion decrease in the Bucharest Stock Exchange (BSE) capitalization between July 24 and November 25, as well.
“In 2007, the exchange rate had the highest volatility levels in the last four years, as an aggressive appreciation trend was overturned in a relatively short time span,” said Catalina Constantinescu, analyst with ABN Amro Romania.
In the first part of the year, the euphoria derived from having the best performing local currency in the region against the euro made investors brush aside signals from international institutions regarding the vulnerability of the Romanian economy (wide current account deficit and a limited coverage by foreign direct investments) and the political instability, Constantinescu added. After the beginning of the US subprime mortgage crisis, investors became both risk-averse and RON-averse.
“In the first seven months of the year, the national currency appreciated against the euro by approximately 9 percent (the July 2007 average against the December 2006 average), but toward the end of 2007 all gains have been erased and there has even been a three percent depreciation compared to the December 2006 average,” said Constantinescu.
“The evolution of the RON-EUR exchange rate was totally disrupted from the fundamentals of the Romanian economy this year. It was heavily influenced by the massive speculative or quasi-speculative capital inflows,” said Dragos Cabat, president of the Chartered Financial Analysts' (CFA) association in Romania.
He said the depreciation in the latter part of the year was rooted in the negative developments on international financial markets and this correction rushed the adjustment of the exchange rate toward its balance point. “Investors lost the ‘speculative urge' they demonstrated in the first part of the year,” said Cabat.
In 2008, both Cabat and Constantinescu expect slightly less volatility than this year, but mostly in the second half of the year.
“We are very likely to see the same high volatility in the exchange rate in the first half of 2008 as well, since the national currency is on a downward trend on the backdrop of seemingly unfavorable international developments. After this point, I hope that the volatility will decrease, even though the natural trend would be to still see a slight depreciation for the RON,” said Cabat of CFA.
He said on the long-term, the volatility of the exchange rate should stay within one or two percent a month as Romania approaches its deadline for euro-adoption.
“However, significant fluctuations are still possible if there is an economic or political crisis in Romania or worldwide. In the latter case we would be dealing with a contagion effect,” said Cabat.
Constantinescu did not foresee any turmoil ahead. “In 2008, the volatility of the exchange rate might be lower than in 2007 as we do not foresee any contrary evolutions of similar magnitude to those we have seen this year. Still, in 2008 and over the medium term as well, we will continue to witness high volatility as the market will continue to deepen, traded volumes will continue to grow and the central bank's presence will have other purposes than maintaining the exchange rate within set limits,” said Constantinescu of ABN Amro.
She estimated a EUR-RON exchange rate of 3.51-3.52 for the end of the year, while Cabat said that the rate that might offer a healthy basis for the national economy next year is RON 3.6 for EUR 1. As high as this level might seem, Cabat said it was still far from where it should be in reality.
“In my view, the EUR-RON balance exchange rate – namely the rate allowing the economy to function at its optimum level, and imports and exports to be at their equilibrium level – is approximately RON 4 for EUR 1,” said the CFA head.
As regards the USD-RON rate, Cabat said its evolution was directly dependent on the USD-EUR exchange rate.
“I think 2008 will be the year when the depreciating trend of the dollar against the euro will be reversed, as Europe will start to feel the delayed effects of the financial crisis in the US. Putting aside some monetary and political problems in the US, the American economy is more productive and more innovative than the European economy, which will be affected by the strong competition from Asia in the upcoming years,” said Cabat.
He estimated that the RON will depreciate more against the dollar than against the euro in the future, reflecting the relative appreciation of the dollar against the euro. Still, he said it was very likely that this effect would only be visible toward the end of 2008.
Constantinescu had an opposing view on the fundamentals of the European and American economies.
“In 2008, we expect the EUR-RON average exchange rate to be lower than this year's average. However, we approximate that the USD-RON exchange rate will slightly appreciate or remain stable, since the EUR-USD rate will continue to grow – the USD will depreciate against the EUR – especially in the second half of 2008,” said the ABN Amro analyst.
Both specialists agreed on one thing: whichever way the EUR-USD rate goes, forex-denominated loans will continue to have the lion's share of banks' credit portfolios in 2008.
“Next year, we might witness a slowdown in the growth of foreign exchange loans, but they will continue to remain substantial, because interest rates for RON-denominated credits will grow more than those for forex loans (if the liquidity on this segment becomes more restrictive). Although individuals and companies experienced the effects of the RON's depreciation first-hand this year, it is more likely that low interest rates for forex loans will weigh more in their decision,” said Constantinescu.
More than anything, forex loans will dominate housing loan portfolios, as their prolonged maturities recommend them over RON-denominated loans.
“Interest rates are lower and the RON is also expected to appreciate on the medium term,” explained Constantinescu.
And Cabat added: “Forex denominated loans should remain attractive over the long term for housing credits, considering their prolonged maturity, which stretches beyond the moment when Romania adopts the euro.”
On the contrary, consumer loans that have a shorter maturity and are used for buying consumer goods in lei, would naturally be denominated in the national currency, he added. “However, this ‘natural' state is altered by the big gap between interest rates in RON and forex loans, especially when this gap is not compensated by the evolution of the exchange rate,” said Cabat.
By Ana-Maria David