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.