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Monday, June 25, 2007

Romanian Interest Rate Cuts?

Bloomberg this morning:

Romania's central bank will probably cut its benchmark interest rate for a fourth time this year to slow appreciation of the leu and help narrow the current-account deficit, a survey of economists showed.

The bank will lower the monetary policy rate to 7 percent from 7.25 percent, according to all seven economists in a Bloomberg survey. An announcement is expected late this afternoon in Bucharest.

The leu has appreciated 2.5 percent against the dollar and 4 percent against the euro since the last reduction on May 2. The annual inflation rate has hovered near post-communist lows while the current account gap is expected to widen in 2007 to 12 percent of gross domestic product from 10 percent last year.

The bank has cut its key rate three times this year from 8.75 percent at the end of last year as the annual inflation rate slowed to 3.8 percent in May from 4.9 percent in December. The central bank targets a year-end annual inflation rate of 4 percent, plus or minus 1 percentage point, this year.

So far this year, the leu has gained 7.5 percent against the dollar and 5.8 percent against the euro, making it the world's 10th-best performing currency. The gains helped widen the current- account deficit to 4.5 billion euros ($6 billion) in the first four months of this year from 2.5 billion euros a year earlier.

Another cut would run contrary to advice from the International Monetary Fund, which said in a report at the end of May that the reductions this year were ``premature.''

The IMF predicted much of the inflationary pressure will come from the government's plans to increase spending, widening its budget deficit to 2.8 percent of GDP this year. It says it needs to boost spending on infrastructure and social programs to help catch up with standards in other EU nations.

Saturday, June 23, 2007

Romania and the Strong Leu

From the BJJ:

Strong leu forces change in Romanian exports

23 Jul 2007

The sharp rise of the Romanian leu this year is forcing smaller manufacturers out of business and prompting a larger shift in exports out of low-value-added goods such as textiles.

The currency has gained 7% against the euro so far this year, after a 10% rise in 2006, leaving hundreds of local exporters, few of whom tap financial markets for protection against currency risk, exposed to heavy losses.
Much of Romanian manufacturing still relies on antiquated technologies and focuses on basic goods such as textiles, which are cheap to produce and sensitive to price movements. “Several hundreds of exporters will finalize bankruptcy procedures by December," said Mihai Ionescu, head of the Romanian Association of Exporters and Importers. "The impact is much worse. Exporters lose €25 million ($35 million) a month every time the leu gains another 1%.” The industry body has repeatedly called on the central bank to intervene to weaken the leu. But the bank has been reluctant to interfere as the strong currency helps to maintain targeted low inflation. Officially, it has not intervened since late 2005 when it bought euros to keep the leu down.

Some analysts have said it may have been in the market covertly earlier this month when the leu hit five-year highs around 3 per euro. The bank denies this. The leu's gains are driven primarily by foreign demand as investors ploughed their cash into riskier assets globally or bet on juicy returns after Romania's European Union entry at the start of 2007. Romania's barely developed derivatives market, which was opened to foreigners last year, gives little incentive for companies to hedge currency risk. But analysts say demand from desperate manufacturers may be just what the market needs.

“We hedge on foreign commodities bourses, but we did not think we had to hedge the exchange rate. We are discouraged by lack of experience," said Serban Carsteanu, strategy and development director of automotive equipment maker Electroprecizia. Romania badly needs exports to offset hefty imports and curb its gaping current account deficit, which is running at just above 10% of GDP. In the first five months of this year, exports rose 12.7%, but imports were up 28.6%, causing the current account gap to more than double from a year earlier to €5.94 billion ($8.19 billion).

Economists warn the deficit could cause a sharp downward spiral for the leu if foreign investment in Romania dries up or global markets turn sour towards emerging economies. Most of Romania's exports, 70% of which go to the EU, are produced by foreign companies or for foreign contractors with access to better technology. “Lots of small exporters will disappear because of lack of investment strategy and willingness to hedge, but that will not be a tragedy,” said Radu Craciun, ABN Amro's head of research in Bucharest. “FDI is high and will generate exports.”

Romania has a good reputation for its textiles and leather goods production facilities, which represent almost a quarter of last year's exports. But high competition from Asian producers has cut textile exports by 2% last year, while machinery and electrical equipment sales rose by 33% in 2006. Analysts expect deeper cuts in textile exports in 2007. (turkishdailynews.com.tr)

Romania Budget Deficit

From IHT:

BUCHAREST, Romania: The Romanian finance minister on Wednesday said the country's proposed 2008 budget foresees a 2.7 percent deficit, with a 43 percent pension hike estimated to cost as much as €6 billion (US$8.3 billion).

Economic growth, estimated to hover at about 6 percent for the next few years, will help support the additional spending, and the government does not plan to raise taxes, Economy and Finance Minister Varujan Vosganian said.

The government also plans a 6 percent cut in payroll taxes.

However, as the average pension increases from 396 lei (US$180, €130) to 568 lei (US$260, €190), the government will need to overspend again in 2008, Vosganian said.

Gross domestic product is estimated to be 438 billion lei (€146 billion; US$202 billion), with the budget deficit estimated to reach 11.9 billion lei (€3.9 billion; US$5.4 billion) — about 2.7 percent of GDP.

The European Union, which Romania joined in January, and the International Monetary Fund have asked the government to tighten public spending and to reduce the budget deficit, which is expected to reach 2.8 percent this year.

In 2008, Romania also plans to spend more on education and health care, two sectors which have been underfunded for years, the finance minister said.