Early Elections Could Weaken Romanian Leu To 4.6 Units Per Euro - ING

The outcome of the presidential elections held December 6, which points to a narrow victory of incumbent Traian Basescu, is likely to trigger a negative reaction on the financial market in the short term, ING analysts said.

"The biggest fear remains early elections (…) But, given the most recent comments from politicians, this scenario has a lower probability than a scenario of a minority government or an alliance," ING noted.

ING said foreign investors were positioned for a victory of Basescu's opponent, social democrat Mircea Geoana, and the swift formation of a new government.

Though prospects for a weaker leu are rising, the central bank's response should not be ignored, as the lender "already proved it is heavily focused on exchange rate control," ING analysts said.

If the formation of a new government is stalled until January next year, the volatility on the Romanian financial markets is likely to persist, with "upside pressure on both EUR/RON and interest rates," ING noted.

Moreover, the leu is likely to weaken further once the new government resumes talks with the International Monetary Fund and the European Commission, as the foreign institutions are likely to insist on "harsh and realistic" measures to be implemented.

The IMF and the Commission have delayed new tranches of a EUR20 billion loan package to Romania until the country has a functioning government which can produce a credible budget for 2010.

"All that matters for the IMF deal is to get a strong government in place soon. The current president already showed he intends to favor reform measures agreed with the IMF, so this is good news for the medium-term prospects of the Romanian economy," ING noted.

According to analysts, Romania's cash budget for 2009 could remain below the cap of 7.3% of the gross domestic product agreed with the IMF, but the ESA95 budget gap could be sharper higher, at around 9% of GDP or higher.

This will most likely prompt the IMF to ask for tougher measures, ING said. "Otherwise, the IMF's credibility could be affected."

The central bank could be inclined to step in and shelter the leu, which means rates could increase further, according to ING. Still, the analysts don't anticipate "aggressive interventions" and estimate the exchange rate would be at 4.3 units per euro in the short term and at around 4.35 units per euro by year-end.

For the first quarter of 2010, the ING expects the leu to trade around 4.5 units per euro.

In addition, ING predicts that in the absence of a new government, the central bank will leave its key rate unchanged at 8% during its next monetary policy meeting January 5.

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