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Thursday, September 27, 2007

World Bank Report on Labour Shortages in the EU10

The European Union's 10 eastern members must take concerted action to increase employment participation levels to avoid a serious short-term slowdown in economic growth and important supply-side structural problems in the longer term according to a report published today by the World Bank.

"Addressing the emerging skills shortages is particularly important, because failure to do so will constrain job creation and future economic growth"

You can find the report summarized here, or you can download direct here.

Claus and I will prepare a full summary and review over the weekend, but for now here are some revealing extracts.

The report in fact says the following:

In this atmosphere of short term turbulence it is important not to lose sight of the longer term trends and the fundamental challenges the EU8+2 continue to face. With the exception of Hungary, growth remains high throughout the EU8+2 and in the case of Latvia represents serious overheating. This growth is sustained largely by consumption and investment. With tightening labor markets, large increases in real wages and employment and very rapid credit expansion, a moderate slowdown in growth may in fact be desirable in the countries showing signs of overheating.

They also have this to say, which is IMHO very important, and to the point:

Unemployment has fallen substantially in virtually all EU8+2 countries since 2004 due to strong growth in labor demand. This has given rise to skill shortages and associated wage pressures, often amplified by out-migration of EU8+2 workers. However, employment/working age population ratios remain relatively low.

Really this is the very point that Claus and I have been making. They then continue:

In contrast to the earlier period of weak labor demand it is now the supply side of the labor market that constrains new job creation. Many persons of working age are economically inactive in EU8+2 either because they lack skills demanded by employers, or because of labor supply disincentives, such as early retirement benefits, generous disability schemes, high payroll taxes, and limited opportunities for flexible work arrangements. These effects are concentrated among the younger and older workers, while the participation rates for middle aged workers are similar to those of the EU15. Hence the main challenge facing now EU8+2 is to mobilize labor supply to meet the demand. Addressing the emerging skills shortages is particularly important, because failure to do so will constrain job creation and future economic growth. To increase the effective labor supply EU8+2 countries need to: (a) improve labor supply incentives through reforming the social security systems, (b) improve worker skills through reforming the educational systems and improving domestic mobility; and (c) import labor with skills that are in short supply by opening labor markets to foreign workers. The weights assigned to each policy depend on the nature of the most binding constraint to labor supply, which vary across countries.

also this is very important, even if I am nowhere near as optimistic as the World Bank is about the possibilities of Eastern Europe staying out of the firing line, especially as the eurozone itself is slowing fast.

The effects of deepening financial turbulence would potentially be more serious for the EU8+2, but are more difficult to predict. The greatest risk is that the countries that have large current account deficits – the Baltics, Romania and Bulgaria – are suddenly less able to finance them through capital inflows and are forced into an economic contraction. This is particularly true for countries like Hungary that are highly dependent on more volatile portfolio inflows than on FDI. Banking sector foreign borrowing which is the main financing source in the Baltics is generally less volatile than portfolio flows, but the extreme surge in the Latvian CAD (to 30% of GDP in the 12 months to end July ) clearly cannot be financed in this way in a sustained manner. There are other potential risks as well. A general retreat from mortgage lending provoked by US experience would lead to broad based credit tightening and weaken the booming construction sector in the EU8+2. Moreover, the increased risk sensitivity may cause the unwinding of carry trades making external finance more difficult for higher interest, carry trade destination countries.


In the latest quarters unemployment rates have either continued to fall or have remained fairly stable despite upward seasonal pressures. In several countries unemployment rates declined to historical minima (the Baltic States, the Czech Republic, and Poland). Employment rates in Latvia, and also in Estonia reached the highest levels since the start of transition and are around 68% for people aged between 15 and 64 years, which is close to the Lisbon strategy target of 70%. Nevertheless, further employment increases may be limited because of structural nature of joblessness due to skills mismatches and unwillingness to relocate or retrain, which is particularly relevant for those who stayed out of the labor market longer.

The recent trends have undoubtedly strengthened the power of employees in the wage bargaining process. Real wages have begun to grow rapidly in Poland where their expansion had been moderate so far. The highest growth is occurring in sectors which suffer most from shortages of workers (for example, construction). Rising employment and strong dynamics of real wages are pushing the growth of the wage bill into double digits. Nevertheless, demands of higher wages for public sector employees come into sight in most countries in the region. In Bulgaria and Poland, trade unions are prepared to resort to strikes or the threat of strikes in wage setting negotiations.

In all countries apart from Slovakia and Slovenia, wages are growing faster than labor productivity. Rising unit labor costs provoke central bankers in the region to tighten monetary policies (Poland and the Czech Republic). Apart from inflationary pressures, excessive ULC growth may undermine competitiveness and prospects for sustained long-term output growth and further labor market improvement.

Wednesday, September 26, 2007

Romanian Central Bank Leaves Interest Rates Unchanged

Romania's central bank today left its key interest rate unchanged, after cutting it four times in previous meetings. The decision was taken as a the effects of an extensive drought and a weaker leu threaten to add to pre-existing inflationary pressures.

The National Bank of Romania decided to leave its Monetary Policy Rate at 7 percent at a board meeting in Bucharest today. According to the press statement

"The short-term inflation outlook has worsened due to a prolonged impact of drought on food prices and the evolution of the leu exchange rate, given the difficulty of assessing the duration and effects of the recent world financial market turbulences..

The analysis of recent trends in macroeconomic indicators reveals a slowdown of the disinflation process and of the economic growth mainly due to supply-side factors (the impact of a prolonged drought on the farming sector) but also attributable to persistent domestic demand pressures. These pressures are also highlighted by the widening external imbalance.

Year-on-year inflation climbed to 4.96 percent in August, close to the upper limit of this year's target band, due to a significant increase of food prices and a correction of the leu's exchange rate against the background of recent turbulences on the world financial markets.

Wage dynamics have accelerated well above productivity growth, emphasizing the risks of deteriorating external competitiveness and of labour cost-related inflationary pressures. "

A drought that damaged two-thirds of Romania's crops this year hus pushed up food prices and a weakening of the leu during this month is making imports more expensive. The government also plans to increase spending, moving an eight-month budget surplus earlier this year into a full-year deficit of 2 percent of gross domestic product.

Romania's annual inflation rate rose to 5 percent in August, reaching the upper limit of the central bank's year-end annual inflation target of 4 percent, plus or minus a percentage point.

A weaker leu since mid-August has helped raise the prices of goods and services indexed to the dollar or the euro, including rents, telephone bills and gasoline. The leu has continued it's decline in September, bringing its loss against the euro since Aug. 1 to 6.6 percent and its drop against the dollar to 3.5 percent.

The International Monetary Fund warned last week that Romania's widening current-account gap makes the economy and the currency more vulnerable to external issues such as international investors' reluctance to place money in emerging markets amid the U.S. subprime crisis.

The current-account deficit widened to a record 9 billion euros ($12.6 billion) in the first seven months of this year from 4.9 billion euros in the same period last year as imports rose because of the stronger leu and the scrapping of many trade barriers when Romania joined the EU.

Monday, September 24, 2007

Romanians in Spain

For those who missed it, here's a graph showing the number of Romanians living and registered in Spain:

This data can give us some idea of how many Romanians are currently living and working outside their country at the moment. We should also remember, of course, that not all the Romanians who have out-migrated since the end of the 1990s have gone to Spain (there are for example a significant number in Italy), although I dare say a fair proportion of them have. The important thing is that we simply don't know. What we do know - and we know it since the Romanians in Spain (whether they are working legally or not) have an interest (like access to the health system and future amnesties) in registering with the authorities, and indeed the Spanish authorities have (for their own reasons) an interest in maintaining the data in a very up-to-date condition - is that according to the Spanish Padron Municipal electronic-data there were 524,995 Romanaians with active and valid id cards for the Spanish health care system as of 1 Jan 2007. These are not just Romanians who are simply passing through, or just might be around somewhere. The municipal registration which lies behind the data is renewable regularly for those without resident permits, and renewing them is how you get the right to have residence later, so this data is VERY accurate.

Just how accurate can be judged from the sort of detailed data you can get from the Spanish statistics office, like the breakdown of Romanians in Spain by age and sex which I present below. And yes there are people in the 75 to 80 (54) and over 85 groups (41), it's just that they are so few that they don't show.

Sunday, September 23, 2007

Romanian Labour Force

Here is some initial data on the Romanian labour force.

Apart from some considerable seasonal volatility there is not too much in the way of a trend to identify here, except, of course, that total employment is not increasing, which is not perhaps surprising. Here now are the numbers of unemployed, and again apart from the volatility there is not a lot to note, except that the numbers are slowly declining.

Again, if we look at the annualised data we can see the position a bit more clearly, since all three - labour force, total employed and numbers of unemployed are all coming slowly and steadily down. This is very common and not especially surprising trend in a steadily ageing society. What is not at all clear is how you can expect to get rates of growth of 5, 6 or 7 per cent annually with such a static labour force.

Romanian Inflation

Long term, inflation in Romania has obviously been coming down:

But if we look at the evolution in the monthly CPI the recent trend is rather different:

We can see that since March this year the trend has now reversed and inflation is on the rise again. This will now need watching very carefully in the months to come in the light of what I have been saying in recent posts on construction cost and wage cost inflation.

In Memoriam of Something

To The Unsung Mothers of Romania

I've just put a very long post up on Demography Matters about Romania's basic demographic profile and the economic problems that are likely to arise as a result. Last night, however, I found myself haunted by something: the huge spike in Romanian mortality that I had found in the data for 1967 and 1968. I couldn't make any sense of it. The annual number of Romanian deaths suddenly rockets up in 1967 and 1968 before gradually tapering off again. In order to understand the explanation for this quite dramatic and tragic situation perhaps the best place to start is with the sudden jump in births which took place in 1967:

What I really want to get at here becomes much plainer if we now come to look at the balance of births and deaths, and especially for those which took place in the late 1960s, since here we will notice that the number of registered deaths rose dramatically in 1967 and it is plain from the way in which the two curves track one another that the pro-natalism policy which lies behind the rise in births does seem to have been somehow linked to the dramatic rise in the number of deaths.

Perhaps in comparison with the huge spike in live births the increase in deaths does not seem too significant, but if we look at the chart for deaths a bit closer up, the increase is readily apparent. Deaths in 1967 were up 21,000 on 1966, in 1968 they were up 31,000 and in 1969 they were up by 43,000 over the 1967 figure.

This jump is undoubtedly the result of one of the most notorious incidents in recent Romanian history, the Ceaucescu pro-natality campaign of the late 1960s. Central to this pronatalist policy was an overnight reversal of the long standing abortion on demand policy, coupled with punitive tax measures for those remaining childless after the age of 25. It is important to be aware at this point that abortion - lamentable as this may have been - had become the central form of birth control for many Romanian women, so this overnight change in policy immediately lead to a huge increase in live births. Unfortunately Romania at the time seems to have had some modern form of Malthusian population, balanced on a knife edge between survival and death, and this rapid increase in extra population seems to have placed huge nutritional and health stress both on mothers and new born babies with the result that the death rate shot upwards in the way we can see above.

Perhaps it isn't necessary to say this at this point (it shouldn't be!), but those of us who are advocating pro-natalist policies to help offset the more dramatic effects of population ageing, normally think in terms of an approach which is more along the lines of the Swedish or French ones, and we would obviously wish to completely dissociate ourselves from the type of coercive pro-natalism which was advocated and implemented by the likes of Ceausescu and his ilk. What we are arguing for is a collective effort on the part of the whole of society (organized inevitably via the state) to transfer resources to those women who would like to have children (Adam Smiths "hidden hand" seems to have gone "missing" at just this point, in the sense that societies and economies do not seem able to guarantee their own reproduction, which is at the end of the day a necessary prerequisite for economic growth as we now know it, so this is precisely the kind of case the old founder of libertarian economics would have had in mind as a justification for state intervention). What is being advocated by modern pro natalists then is a policy to support choice, one based on the secure knowledge that our collective interest as societies lies in the direction of doing this, and of reproducing our populations (even if in decline) across a stable trajectory. Our future lies in this direction since otherwise.... well, unfortunately we are more than likely just about to find out what the otherwise alternative is in the present Romanian case.

So why did this happen? What actually happened back in the Romania of the late 1960s. Was there a famine, was there an epidemic? It appears not. Googling the internet I found this:

With a political system in place that made long-range planning the cornerstone of economic growth, demographic trends took on particular significance. As development proceeded, so did disturbing demographic consequences. It soon became apparent that the country was approaching zero population growth, which carried alarming implications for future labor supplies for further industrialization. The government responded in 1966 with a decree that prohibited abortion on demand and introduced other pronatalist policies to increase birthrates. The decree stipulated that abortion would be allowed only when pregnancy endangered the life of a woman or was the result of rape or incest, or if the child was likely to have a congenital disease or deformity. Also an abortion could be performed if the woman was over forty-five years of age or had given birth to at least four children who remained under her care. Any abortion performed for any other reason became a criminal offense, and the penal code was revised to provide penalties for those who sought or performed illegal abortions.

Other punitive policies were introduced. Men and women who remained childless after the age of twenty-five, whether married or single, were liable for a special tax amounting to between 10 and 20 percent of their income. The government also targeted the rising divorce rates and made divorce much more difficult. By government decree, a marriage could be dissolved only in exceptional cases. The ruling was rigidly enforced, as only 28 divorces were allowed nationwide in 1967, compared with 26,000 the preceding year.

Some pronatalist policies were introduced that held out the carrot instead of the stick. Family allowances paid by the state were raised, with each child bringing a small increase. Monetary awards were granted to mothers beginning with the birth of the third child. In addition, the income tax rate for parents of three or more children was reduced by 30 percent.

Because contraceptives were not manufactured in Romania, and all legal importation of them had stopped, the sudden unavailability of abortion made birth control extremely difficult. Sex had traditionally been a taboo subject, and sex education, even in the 1980s, was practically nonexistent. Consequently the pronatalist policies had an immediate impact, with the number of live births rising from 273,687 in 1966 to 527,764 in 1967--an increase of 92.8 percent. Legal abortions fell just as dramatically with only 52,000 performed in 1967 as compared to more than 1 million in 1965. This success was due in part to the presence of police in hospitals to ensure that no illegal abortions would be performed. But the policy's initial success was marred by rising maternal and infant mortality rates closely associated with the restrictions on abortion.

Now I'm still not that sure what actually happened back there in 1967/68, but it does seems that many of the million extra people who died during those two years were mothers and young children, the innocent victims of an official policy of criminal hysteria. So, even if it isn't much of a thing to do, I would like to dedicate this post to those who died, indeed you might say those who gave their lives for their country, right or wrong. Under the circumstances it seems the least I can do.

As usual, if anyone has any specific information to add about what actually happened at the end of the 1960s, please feel invited to do so.

I also found this, which is also very much to the point:

I was in Romania in 1977 as a speaker on world population issues. I was warned that I could talk about the population policy of any country of the world except Romania. Government representatives were with me at all times to see that I followed those directions. But I was determined to learn how Romanian women were controlling their birth rate, when every means of control had been denied them.

Finally, at a crowded party, with my official spies momentarily out of hearing range, I had an opportunity to find out. I was talking to the head of obstetrics at a major Bucharest hospital. I told him I wondered how the birth rate had fallen, and then I asked, "What has happened to your maternal mortality rate?"

He looked straight at me. He got my drift. "It has become very, very high," he said with great sadness. In nearly every country women who die of complications from abortion, legal or illegal, are listed in health statistics as maternal mortalities. Later I saw some actual figures. As the birth rate came down in Romania after Decree 770, the maternal mortality rate tripled.

Ceausescu's policy to increase the Romanian population failed to achieve its goal. It imposed pain, injury, and death on Romanian women. It also created another problem, which will be with the country for 80 years or so -- the short, sharp baby boom of '67.

Imagine the strain on obstetrics wards in the year when the birth rate doubled. Imagine the demand for first-grade teachers six years later. The kids born in 1967 either had to put up with extra-large classes throughout their education, or they caused frantic adjustments in the system every year as they advanced. Behind them came more adjustments, as the following cohorts were smaller again. Our own school system had its difficulties with the passage of a smaller and more gradual baby boom; imagine the problems in impoverished, oppressed Romania.

So at a time when we all as European are becoming more and more aware of those many episodes in our history which we would often prefer to forget, perhaps it might be an idea to find the space to dedicate some time to these innocent victims of collective folly. Perhaps instead of busying ourselves building so many new blocks of flats, we might also like to find the time for one small monument somewhere, to commemorate those who died.

Friday, September 21, 2007

Construction Production Index July 2007

Eurostat has just published the monthly construction production index. For our purposes here is what is perhaps the most significant extract:

Annual comparison

Among those Member States for which data are available for July 2007, construction output rose in seven and fell in seven. The highest increases were recorded in Romania (+26.3%), Slovenia (+17.9%) and Poland (+17.0%). The largest decreases were recorded in Hungary (-14.6%), the United Kingdom (-6.6%) and Belgium (-4.9%).

Here's the construction output index for the most recent months:

What we can see is that the rate of expansion has slowed noticeably over the last three months. Now here's the quaterly index going back to 2002:

and here's a chart of the monthly year-on-year changes going back to the start of 2005. As we can see there was a massive rate of increase which seems to have peaked in April of this year, since which time it has been slowing down.

The result of all this frantic construction activity in an economy with constrained capacity is, of course, completely to be expected: the price of construction surges upwards:

The effect of this on wages and salaries should not surprise us too much either, and here is the index of salaries to confirm our worst suspicions:

As we have noted, and despite the inability of the Romanian government to face up to this at either the official statistical level, or at the level of beginning to grasp the implications, there are currently nearly half a million Romanians working in Spain, and logically these Romanians are not available to work in construction in Romania, so it is hardly surprising if wage inflation in construction has been enormous, as again can be seen in the year on year quarterly increase chart:

Thursday, September 20, 2007

Another bad day for the Leu

Well as might have been expected following all the political argument, today was another bad day for the Leu. Of course the euro passing through the $1:40 won't have helped any either.

Possible Romanian Elections?

Well, as if Romania didn't already have enough problems, this news today is hardly going to help:

Romania's opposition Social Democrat Party, the largest group in parliament, said it will put forward a no-confidence motion next week aimed at ending the minority government of Prime Minister Calin Tariceanu.

``We have decided to move forward with this no-confidence motion on Monday, Sept. 24,'' Mircea Geoana, the Social Democrats' president, said in a statement late yesterday televised on Realitatea television. ``We don't see how a new government can be formed and we think the possibility of early elections is becoming more likely.''

The Social Democrats, formed by ex-communists after the anti-communist revolution in 1989, have about 150 seats in the 465-seat parliament and would need to ally with other opposition parties to get the motion passed.

Some prominent Social Democrats, including former Romanian President Ion Iliescu, said they oppose the motion, which could force elections a year earlier than scheduled.

Infighting between the main political parties since Romania joined the European Union on Jan. 1 has delayed programs meant to speed up the absorption of EU funds and fight corruption, a key EU demand. Tariceanu and President Traian Basescu, former allies, split early this year amid mutual accusations of corruption.

In April, Tariceanu ousted the Democratic Party, which supports Basescu, from the government, firing all ministers loyal to Basescu. The Democrats joined the opposition with their 100 seats in parliament, leaving Tariceanu's supporters with about 100.

Basescu has repeatedly called for Tariceanu's resignation and has indicated his party may support a no-confidence motion.

Wednesday, September 19, 2007

Romania Wage Inflation

Romania Employment Participation Rates

Romanian Migration: Lies, Damn Lies, and Statistics

Well, the argument on this blog is about to start developing as I gather the data together on Romania.

One of the important topics to get to grips with in trying to assess the future path of the Romanian economy is the level of out-migration which has taken place in recent years (in this sense the situation is very similar to the Polish one, with the exception that the Polish situation has had a lot more media coverage.

So to try and get some data to put online I took a look at what Eurostat had. Here is a graph of the information the Romanian statistical authorities have provided to Eurostat.

Nothing out of the normal here you might think. Simply a country with a very low level of migrant flows. The data is for net movement, so there could be larger numbers of people coming and going, but still, the order of magnitude difference cannot be that large, or can it?

Now lets take a look at the data provided by the Spanish national statistics office (the INE) for Romanians resident in Spain over the last few years, and compare this data with the official numbers.

Wow! Well there does seem to be something happening after all. And not all the Romanians who have out-migrated since the end of the 1990s have gone to Spain, although I dare say a fair proportion of them have. The thing is we don't know. What we do know - and we do know since the Romanians in Spain have an interest in registering - whether they are legally working or not, and due to the fact that the Spanish authorities have an interest in maintaining up to date data - is that according to the Spanish Padron Municipal electronic data there were 524,995 Romanaians with active and valid id cards for the Spanish health care system as of 1 Jan 2007. These are not just Romanians who are simply passing through, or just might be around somewhere. The municipal registration which lies behind the data is renewable regularly for those without resident permits, and renewing them is how you get the right to have residence later, so this data is VERY accurate.

But we don't know how many Romanians are currently living and working outside Romania in total (or how many Moldovans are living and working in Romania, which is the other side of the problem) and we don't know because the Romanian national statistics office and the Romanian government don't see the issue as important enough to take the trouble to give this the same sort of priority the Spanish government do, despite the fact that Romania is now a member of the EU, and depsite the fact that it is considered normal that Romanian wages should rise rapidly towards European levels. European levels means European levels in every sense of the word.

But the Romanian authorities will regret this failing. They will regret it since, as the analysis on this blog will attempt to demonstrate, in the coming economic crisis in Romania, the outflow of people, and the reverse inflow of money in the form of remittances, and the subsequent distortions in the kinds of economic activity which are undertaken will, unfortunately, turn out to be very important.

So, please, will any one out there with any reasonably accurate data to offer on this situation please get in touch.

Romanian Inflation

IMF in Romania

Bloomberg is reporting that the IMF is beginning a week-long tour of Romania. Juan Fernandez-Ansola, the IMF's senior East Europe representative, is quoted as saying that:

"We will look at the question of exchange-rate development and see what impact that will have going forward"

And well he might, of course. Strangely the Leu seems to have bounced back a bit today, after a really horrible day yesterday. I am not exactly sure what the reasons for the rebound are, but I am not anticipating that this will be any sort of sustained trend. All the markets have been thrown a bit by Bernanke's decision yesterday, but the initial relief may well soon be followed by growing preoccupation about theactual impact of the impending US recession that the rate decision was in fact a response to. The question in this context is, when will the next Federal Reserve move down be, and how much will it be?

As Bloomberg note the recent drought damaged 4 million of the six million hectares of crops planted in Romania this year, and this has helped push-up food prices significantly in August, leading the inflation rate accelerated to accelerate to an annual 5 percent, from 4 percent in July.

According to Fernandez-Ansola Romania's economy is vulnerable to the subprime mortgage crisis in the U.S. due to Romania's dependence on capital inflows to cover a widening current-account deficit. Ansola in fact said during a visit to Romania last May that the central bank's interest-rate cuts this year had been ``premature'' because of potential inflation pressures which might impact towards the end of the year.

The National Bank of Romania maintained its benchmark Monetary Policy Rate at 7 percent on July 31 after cutting it at four consecutive meetings this year, citing slowing inflation as the main reason for the pause. The rate was 8.75 percent at the end of 2006.

The central bank, which is scheduled to make its next interest rate decision on Sept. 26, targets a year-end annual inflation rate of 4 percent this year, from 4.9 percent last year.

Romania's current-account gap in July swelled to 8.97 billion euros from 4.9 billion euros a year earlier. Imports surged as the leu strengthened on the year and Romania's entry to the European Union obliged the country to eliminate many trade barriers.

The other big issue is the government deficit. Fernandez-Ansola pointed out earlier this year that Romania's government risked violating EU conditions that limit members' state budget deficits to a maximum of 3 percent of gross domestic product. In fact in January the Romanian government targeted a budget deficit of 2.8 percent of GDP but Fernandez-Ansola strongly argued that this overestimated potential revenue and underestimated expenses. However, on Sept. 6, Finance Minister Varujan Vosganian lowered his year-end budget deficit estimate to 2 percent of GDP, citing higher-than-expected revenue as rising wages increased income tax collection.

The IMF Romania page can be found here, for those who wish to follow the outcome of this review.

Tuesday, September 18, 2007

Monday, September 17, 2007

Euro-Leu Chart 17 September 2007

Here's todays chart. It was obviously another very hard day.

The Leu Continues To Come Under Pressure

Romania's leu fell to a more than six-month low against the euro this morning. The leu in fact declined for a fifth consecutive day, extending losses after recording the biggest daily decline in almost two weeks on Friday. The leu fell 0.9 percent to 3.3905 per euro by 11:08 a.m. this morning in Bucharest, its lowest since March 5. This was a decline from 3.3599 late last Friday.

The leu is now the worst-performing of 26 emerging market currencies against the euro since mid-August.

Here is the one day chart I prepared for last Friday:

and here is the one month chart (again as of last Friday).

Basically the Romanian currency seems to be the weak chink that currency market operators have found in the emerging market defence system, and I feel that the decline in risk appetite will start to really show its teeth here. In this sense the issue is longer term and structural as my colleague Claus Vistesen explains here.

But there are short term "movers" of the situation. One of these is undoubtedly the climate, and the dependence of the Romanian economy on agriculture. In this sense it is significant - despite the fact that the most pressing problem the country is likely to experience in the mid term is an acute labour shortage as the effects of longer term low fertility and large scale out migration of working age population really start to bite - that Romania's unemployment rate rose in August as a drought that damaged most of the country's crops reduced the need for manual laborers to collect the harvest. The proportion of the workforce out of work rose to 3.9 percent, from 3.8 percent in July, according to data released by the National Labor Agency today.

The other big downward driver is the current account deficit. The Romanian central bank has said that the current account gap swelled to 8.97 billion euros in July, from 7.81 billion in June.

Thursday, September 6, 2007

The Leu Continues Downwards

Here's today's chart for the leu:

The zloty had a much better day today:

The Turkish lira continued its slow climb back up:

as did the forint:

Wednesday, September 5, 2007

Romanian Leu on the Slide

Following on from my last post on the leu, here's the latest 24 hour chart on the euro-leu cross.

Analyst Lars Christensen at Danske Bank has also picked up on what has been happening to the leu, and has published a research note which I reproduce below and the substance of which I basically agree with at the analysis level, although I am not, of course, recommending anyone to buy or sell anything.

Since the beginning of July, the Romanian leu (RON) has weakened significantly. However, we see room for significantly more weakness in RON and therefore recommend to Buy EUR/RON spot.

We give the following reasons for more RON weakness:

• The Romanian economy is among the most imbalanced economies in the Emerging Markets universe, with overheating asset markets, excessive credit growth and a large current account deficit. We place Romania in the same “group” of countries in CEE as the Baltic states and Bulgaria in terms of heightened risk of a hard landing in the economy and financial distress. However, while there are currency pegs in the Baltic states and Bulgaria, there is a floating exchange rate in Romania. Hence, the leu is the easiest case to trade if one wants to trade the case of overheating in CEE.

• Fiscal policy is strongly pro-cyclical and hence contributes to increasing imbalances in the economy. The political situation remains uncertain.

• After the recent rise in FX volatilities the key policy rate in Romania of 7.0% does not give any real protection in terms of carry-to-risk.

• The large Romanian funding needs – due to the high external imbalances – make the Romanian markets and economy sensitive to a global credit crunch.

• Romanian households to a large extent have funded real estate investments in foreign currency (mostly EUR and CHF) and that makes them very exposed to currency risk.

• The leu is the most overvalued currency in our entire Emerging Markets universe. Some of our models indicate that RON could be overvalued by more than 30% on a fundamental basis.

• Technically, we have broken the nearly three-year downtrend in EUR/RON and a new uptrend has been established. According to our technical analysts, EUR/RON will meet resistance around 3.40.
If this resistance is broken then the next resistance level is around 3.55.

Leu on the Run Down

Romania's leu fell for a seventh straight day today - to its lowest level in four months against the euro. The leu fell 0.4 percent this morning to trade at 3.3245 per euro - at 12:25 p.m. in Bucharest - its lowest since May 1. The currency gained 8.5 percent against the euro between January and June, and since that time it has been the second worst performer among the 26 emerging market currencies which are tracked by Bloomberg, losing 6.25 percentover the period.

Today's decline is attributed to a number of factors, such as the fall in the benchmark NTX Index of 30 large companies in Central and Eastern Europe - which declined 0.2 percent today - or comments from Japanese bank regulator Yoshimi Watanabe about Asian exposure to US sub prime mortgage issues, but the fact of the matter is that Romania's economy is seen as being increasingly vulnerable given the global decline in risk appetite and the developing credit crunch.

Here is a two year euro-leu cross chart, where the turnround from the end of June is quite apparent:

and here's the chart for the last month where the steady deterioration in the situation is again most clear:

Tuesday, September 4, 2007

Romania, Q2 2007 GDP

Romania's economic growth unexpectedly slowed in the second quarter as a prolonged drought damaged agricultural output and the trade deficit widened. Gross domestic product grew an annual 5.6 percent, from 6 percent in the first quarter, according to the National Statistics Institute in a preliminary release out today.

The Romanian government had already warned that record temperatures and low rainfall this year were damaging farm production and would slow economic growth to an annual 7 percent at the end of this year. The economy grew at an annual 7.7 percent in 2006, its eighth consecutive year of growth after four years of recession.

Damage to agriculture by widespread flooding in Romania in 2005 was largely responsible for slowing economic growth that year to 4.1 percent.

The trade deficit has widened this year. The deficit was running at 1.76 billion euros in June, up from 1.2 billion euros a year earlier as imports increased 22 percent and exports rose 9.2 percent.

Gains in the leu have made imports cheaper and made exports more expensive abroad. The leu has strengthened 15 percent against the euro and 22 percent against the dollar in the past year, making it the world's sixth best-performing currency.

The government is also planning to increase spending, widening its budget deficit to 2.7 percent of GDP in 2007 from 1.7 percent of GDP in 2006. In the first half of the year, limited spending growth left the fiscal deficit at 0.19 percent of GDP.

Monday, September 3, 2007

Romanian retail sales July 2007

Romanian retail sales rose at the fastest annual pace this year in July because of higher wages, a stronger currency and a surge in consumer credit and construction of new stores since the country joined the European Union.

Sales increased an annual 23 percent, from a gain of 16 percent in June, the National Statistics Institute said. On a monthly basis, retail sales grew 9.2 percent after stagnating in June.

Sales of food, drinks and tobacco rose an annual 38 percent, from 24 percent in June and sales in the services industry increased 1 percent compared with a drop of 2.7 percent. Sales of non-food goods rose 9.1 percent, from 8.3 percent in June.

Consumption rose as higher investment since Romania joined the EU on Jan. 1 strengthened the currency and boosted wages. Average net wages rose an annual 24 percent in July. The leu is up 22 percent against the dollar and 15 percent against the euro in the past year, encouraging Romanians to buy more imports.

Romanians have also borrowed more to buy consumer goods and homes, pushing up private debt an annual 46 percent in July.

Retailers including Auchan SA, Carrefour SA, IKEA, Metro AG, Praktiker AG and others have announced expansions since Romania joined the EU. Bucharest-based Altex Impex SRL, Romania's biggest household-appliances retailer, said in August it will boost staff by almost 20 percent this year and open seven new stores to further take advantage of surging retail sales.