Tuesday, January 20, 2009

Romanian Leu May Plunge 9% in 2009 as Economy Shrinks

By Irina Savu

Jan. 19 (Bloomberg) -- Romania’s leu, the worst performing emerging-market currency this year, may plunge about 9 percent to a record against the euro as the economy contracts, ING Groep NV said.

The leu will decline to 4.7 per euro in “coming quarters,” Nicolaie Alexandru-Chidesciuc, senior economist in Bucharest at ING Bank Romania, wrote in a note to clients today. The leu declined 0.2 percent to 4.2946 in Bucharest today at 5:12 p.m. from 4.2877 on Jan. 16. The currency touched an all- time low of 4.3529 last week.

Romania is likely to post a budget deficit of 7.5 percent of gross domestic product, the biggest among emerging-market economies in the region, the European Union said today. Industrial output plunged in November by the most in more than eight years, while the current-account deficit widened to 16 billion euros ($21 billion).

“The biggest pressure for Romania comes from a wider budget gap, together with insufficient measures to correct this during 2009,” Alexandru-Chidesciuc wrote.

Romania’s economy may contract 3.5 percent this year, he said. While Europe, the U.S. and China are providing packages of spending and tax cuts to stimulate their economies, Prime Minister Emil Boc has pledged to cut expenditure on goods and services by 20 percent and keep consumer taxes unchanged.

The government forecast Jan. 16 that economic growth will slow to 2.5 percent this year from 7.8 percent in 2008.

Standard & Poor’s and Fitch Ratings downgraded Romania’s debt rating to junk in the final quarter of last year, citing in part increased government spending. Fitch lowered Romania two levels to BB+ from BBB while S&P cut its rating on the country to BB+ from BBB-.

The International Monetary Fund, which has already offered aid to Latvia, Hungary, Iceland, Serbia and Ukraine, is due to visit Romania at the end of this month. Romania, which has $75 billion in external debt to be refinanced, hasn’t sought IMF help to date.

“The deepening recession in developed economies is likely to increase pressure on emerging-market currencies,” Alexandru- Chidesciuc wrote. “This is indeed the case for the leu.”

To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net.

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