Citi Sees Romanian Leu At RON3.95 Vs Euro By Yearend

Also, Citi revised the country’s GDP contraction in 2009, at 4.3%, from previously seen 2.5%.

Citi expects the EUR/RON exchange rate at around 4.10 in the second quarter, at 4.00 in the third quarter and at 3.95, by year-end. The envisaged trajectory for the EUR/RON rate amounts to a real depreciation of about 6.0%.

Citi economists said mid-April the leu exchange rate may set at 4.12 by yearend.

"We would like to underline the central bank's willingness to ease its policy stance more aggressively than before may have implications for the leu," Citi also said.

Thus, the central bank BNR is not likely to intervene unless the currency appreciation is accompanied with an abrupt halt in the external adjustment.

“Moreover, large deviations from the economic programme’s fiscal targets, and political noise ahead of Presidential elections in November, may undermine investor sentiment, thereby adversely affecting the currency," the report read.

Citi equally revised down its economic growth forecasts in 2010, from 4% at 1.3%.

"The marked deterioration in consumer confidence and economic sentiment indicators - along with the marked rise in the unemployment rate to 5.7% in April from 4.4% in December 2008 -underline the severity of economic downturn. The tightening global financial conditions, reversal of capital inflows and shrinking export markets have precipitated a major growth reversal," the report also read.

Also, Romania’s near-term economic prospects have improved considerably, thanks to the EUR20 billion IMF-E.U. led financial package. Despite significant implementation risks, particularly on the fiscal front, Citi analysts believe that the programme also improves the medium-term economic outlook.

"Successful implementation of the IMF-EU-supported programme has important implications beyond weathering the crisis. A credible implementation of the programme should put Romania in a stronger position for ERM 2 entry in 2012," the bank also said.

Lower food and commodity prices as well as aggregate demand weakness and the recovery of the leu should help lower inflation to around 5.0% in 2009, from 6.3% in 2008.

"In view of May’s higher-than-expected rate cut by 0.5 percentage points and the new inflation report, we believe that the BNR is likely to pay more attention to the rising output gap. This, coupled with the IMF-EU-led multilateral financial package and the stronger-than-expected external adjustment, is likely to encourage the BNR to ease more aggressively during the remainder of this year," the report also read.

Citi analysts believe that the BNR will lower its policy rate to 7.25% by the end of this year from the current 9.5%.

Also, Citi sees the country’s large current account deficit narrowing to around EUR9 billion, or 7.4% of GDP, this year, from almost EUR17 billion, or 12.3% of GDP, in 2008.

Citi's report was drafted after economists' meetings between May 6 and 7 with officials within Ministry of Finance, central bank, international financial institutions and independent analysts.

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