Romanian Leu Could Lose Another 5% Vs Euro, After Dropping 11% In 2008 - Erste

The Romanian leu depreciated strongly on Thursday, in a volatile trading session, and touched its all-time low at RON4.18 versus the euro at the end of the session.

 

“Currencies showed varying performances during recent weeks, but volatility evened out. The most promising currency for the first quarter seems to be the Polish zloty (…) On the other side of the spectrum sits the Romanian leu, which could lose another 5% versus the euro given the huge current account deficit,” Erste Group’s report said.

 

Erste Group sees Romania’s foreign account deficit at 13.6% of the gross domestic product, or GDP, in 2008. Erste forecasts the foreign account gap to drop to 12% of the GDP in 2009 and to 9.8% of the GDP in 2010.

 

Erste analysts said the international investors’ skeptical approach toward the Central and Eastern Europe region would probably improve “only slowly” and the global environment will remain uncertain.

 

“Nonetheless, while the countries have to be looked at on an individual basis, we firmly believe in a macro economic outperformance of the region,” the report said.

 

However, one common factor is the low level of indebtedness, according to Erste. Household debt in the region varies between 20-40% of GDP, while in Euroland the respective figure is close to 60% and in the US marginally under 100%.

 

“So, while the pace of debt growth without doubt has been exaggerated in some countries, the debt burden seems more manageable than in advanced economies. Sure, Romania and Hungary have a significant proportion of foreign currency loans, but the HUF has weakened by 14% versus the Swiss franc and the Romanian lei by 11% versus the euro since the beginning of 2008,” the report said.

 

Erste sees Romania’s economic growth at 7.6% in 2008, while forecasts for 2009 and 2010 point to a GDP growth of 4%, and 5.4% respectively.

 

However, Erste considers “a positive surprise” might be a more coherent fiscal policy, particularly in a difficult year, with Romania’s consolidated budget deficit dropping below 3% of GDP.

 

“This could be achieved through significant public expenditure cuts, while increasing the focus on capex - mainly infrastructure projects, and a reduced profile of welfare expenditure,” Dumitru Dulgheru, analyst at Erste-owned Banca Commerciala Romania, said.

 

According to the report, Romania’s budget deficit is seen at 3.2% of the GDP in 2008, 4% of the GDP in 2009, and 3.3% of the GDP in 2010.