The appointment of a second government in less than three months saw the Romanian currency (the RON) fall close to 1 percent against the Euro, but economists say the EUR/RON exchange rate will calm down once the Ponta government settles into Victoria Palace.
The Ungureanu government lost power on April 27 following a no-confidence vote from opposition MPs and the new government should be voted in by MPs on May 7. The EUR/RON rate was impacted by the development, dipping to a historic low of 4.4168 on May 2, down 0.96 percent since the fall of the Ungureanu government. On late Friday, the RON had picked up again but was still trading around 4.4. In the year to date, the Romanian currency has lost 1.99 percent against the Euro.
“The RON depreciated significantly in trading on foreign markets, as the domestic one was closed on May 1. Since Wednesday, the exchange rate has fallen to 4.41 RON/EUR and the trend is for the RON to appreciate,” said Dan Bucsa, chief-economist at UniCredit Tiriac Bank. He predicts the RON may be trading below 4.4 once the new government is voted in and reaches an agreement on the letter of intent with the IMF. However, he adds that only by increasing exports, FDI and EU fund absorption will the RON appreciate below 4.4 RON/EUR.
Mihai Patrulescu, economist at Bancpost, said the recent political pressure was at the core of the RON’s depreciation. “Foreign investors were already wary of risks as political instability was always going to be an issue in an election year,” he said.
The reassurance from the Ponta government that it will collaborate with the IMF, World Bank and European Commission and will target a budget deficit below 3 percent on ESA terms put the brakes on the RON’s depreciation, according to Melania Hancila, head of the research and strategy department at Volksbank.
“We might see a stronger recovery of the domestic currency against the Euro once the new government settles in,” she commented.
Mugur Isarescu, governor of the National Bank of Romania (NBR), said last Wednesday that foreign investors are holding RON 10 billion (around EUR 2 billion) worth of bonds issued by Romania and their reactions are harder to control from Bucharest. Isarescu says the largest share of the trading involving RON happened abroad.
“We are glad that things were calm in Bucharest, and the trading volumes were not large. It seems that things have stabilized,” said Isarescu, quoted by Agerpres newswire.
In a report released last week on the top 10 challenges facing the Romanian economy, BCR predicted the RON was likely to remain within the 4.3-4.5 range against the Euro for most of 2012. BCR analysts say there will be further episodes of instability followed by calmer periods, although the central bank will dampen soaring volatilities.
Low impact on inflation
Romania ‘s inflation rate dropped to 2.4 percent in March and the governor says it will further decrease to 2 percent in April, adding that the exchange rate will play a minor role in this. “We don’t see a major impact. There will probably be variations of 0.1, 0.2, 0.3 percent, not significant,” says Isarescu.
Bucsa of UniCredit said the RON’s depreciation was brief and insufficient to significantly impact the price of imported goods. “If the exchange rate returns below 4.4 RON/EUR, the depreciation in May will be of a maximum of 0.5 percent against April,” he said.
Patrulescu of Bancpost expects consumer prices to remain within the NBR target interval of 3 percent ±1pp, in spite of exchange rate fluctuations and the harsh winter conditions, adding there is still room for easing monetary policy. The NBR decided last week to keep the interest rate at 5.25 percent, although it had previously decreased it three times since last November.
The Volksbank economist says chances are high for the RON to return to levels seen prior to the fall of the government, respectively 4.37-4.38 RON/EUR, allowing the NBR to further lower the key interest rate to 5 percent.
On Monday, the RON/EUR exchange rate stood at 4.4053, up 0.02 percent from Friday.