BCR Expert’s Column
LEU has strengthened lately despite fragile global context
The leu seems to cruise along impervious to the distressing train of events that started with social unrest in several countries in Africa and the Middle East and culminating with the tragic news from Japan. However, the very rapid appreciation of the leu below 4.1 has not been paralleled by visible improvement in the investor sentiment towards the region. What is more, Fitch has put Romania on hold for the time being and sees risk in the area of fiscal consolidation. It is true that some macro indicators for January or February, such as industry, the improved figure of the trade deficit, or perhaps the anticipations that the country is gradually getting out recession may have pulled the leu away from its regional peers, but in any case, the appreciation came in pretty fast.
Some NBR officials governor made some public statements in late March and suggested that further appreciation is possible. At that time, they said that 4.15 was very much in line with the economic fundamentals and was based on market conditions. The central bank remains preoccupied with excessive volatility of the national currency, should this emerge. The news flow from the IMF and EU side has been positive lately, while the EU disbursed the final tranche of EUR 1.2bn to the MinFin as part of the multilateral financial assistance package that ended in March. The new precautionary deal with IMF that was recently rubber stamped may create a positive outlook for the leu in the short term and we now see the 4 -4.2 range for EURRON as more realistic against a current international backdrop where emotions are sometimes running high and where sentiment could change overnight. The central bank will continue its managed floating regime to prevent high volatility in the period ahead, while developments of the local currency remain largely correlated with the way public reforms are further implemented in Romania and above all with investor perception about the progress of the fiscal consolidation program.
Romania rating on hold for now – Fitch
Fitch Ratings has acknowledged the progress made by Romania in terms of enforcing the reforms asked for by the IMF and EU over the last year, but sees risks in the area of fiscal consolidation, which will keep its sovereign rating below investment grade for now. The main risk, according to Fitch, is that fiscal consolidation will not happen as quickly as planned, while other risks include a potential slowdown in policy reform and the status of Romania’s external finances. Regarding future actions, Fitch will look to see how things develop this year. Fitch and Standard & Poor’s rate Romania at BB+, while Moody’s rates it at Baa3 (investment grade) with a stable outlook. In our view, this implies that a rating upgrade is possible in 2012 at the earliest. Although there are some risks for populist measures in a pre-election year, the new agreement with the IMF/EU is a safety belt in this respect.
Moreover, Romania’s external financial indicators have improved significantly over the last two years. The C/A deficit adjusted to 4.2% of GDP in 2010, from as high as 11.6% in 2008. The central bank’s FX reserves increased to EUR 32bn and now cover almost nine months of imports of goods and services and short-term private external debt decreased. Fiscal consolidation efforts are bearing fruit at present and the budget deficit is expected to decline to around 5% of GDP in 2011 (Eurostat methodology), from 8.6% of GDP in 2009. A regaining of the investment grade status in 2012 would boost FDI inflows to more than EUR 5bn per year and enable a pickup of economic growth.
Romania has yet to push ahead with reform in the public sector, which currently is only half-way through. As we have repeatedly mentioned, foreign investors, analysts and rating agencies are mostly impressed by results rather the promises. Romania has lately demonstrated that it can stick to its promises and managed to see through the first IMF stand-by arrangement in the last 20 years, meeting most of the performance indicators agreed and adopting important reform packages. Political stability is a prerequisite for the reforms, and from this point of view, the fragile political environment has oftentimes made the reform come in fits and starts, frittering away the chances for a faster recovery. Closing a new deal with the IMF, a precautionary one this time, should be seen as an opportunity to capitalize on what has been achieved so far and gaining further ground, as overall sentiment continues to improve.