Wednesday, September 19, 2007

Romanian Leu, Drought Are Inflation Risks, IMF Says (Update1)

By Adam Brown

Sept. 19 (Bloomberg) -- The weakening of the Romanian leu and the effects of a drought in 2007 are the top risks to the central bank's inflation target for this year, the International Monetary Fund said.

``We will look at the question of exchange-rate development and see what impact that will have going forward,'' Juan Fernandez-Ansola, the IMF's senior regional representative, said in a meeting with journalists in Bucharest today. The IMF starts a week-long mission on Sept. 26 to review economic developments, and plans to make concluding statements in early October.

A drought that has damaged 4 million hectares of the six million hectares of crops planted in Romania this year pushed up food prices in August, when the inflation rate accelerated to an annual 5 percent, from 4 percent in July.

The local currency, the leu, also weakened in August and the first half of September, increasing prices of services and goods indexed to the dollar and euro, including rents, telephone bills and gasoline.

The country's economy is vulnerable to the subprime mortgage crisis in the U.S. because Romania depends on investment inflows to cover a widening current account deficit, Fernandez-Ansola said. He said, though, that he doesn't think ``Romanian banks were exposed the way that other large European banks were.''

Rate Cuts

Fernandez-Ansola said inflation in the first half of the year was slightly lower than expected and the central bank's interest cuts ``perhaps were appropriate.'' He said during a visit in May that the interest rate cuts this year were ``premature'' because inflation pressures were set to increase.

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. The rate, the annual amount the central bank offers to commercial banks for one-month deposits, was 8.75 percent at the end of 2006.

The central bank, 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.

`Prudent' Budget

Fernandez-Ansola also said the government has been ``prudent'' with its budget, registering a surplus of 0.5 percent of gross domestic product in the first eight months of the year.

Ansola said early this year that the government risked violating EU conditions that limit members' budget deficits to a maximum of 3 percent of gross domestic product. In January, the government targeted a budget deficit of 2.8 percent of GDP although Ansola said it overestimated revenue and underestimated expenses.

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.

To contact the reporter on this story: Adam Brown in Bucharest at abrown23@bloomberg.net

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