Wednesday, January 7, 2009

Romanian Leu Trades Near 4-Year Low After Rate Kept Unchanged

By Ewa Krukowska

Jan. 6 (Bloomberg) -- The Romanian leu fell to near a four- year low versus the euro after the country’s central bank unexpectedly kept the European Union’s highest interest rate unchanged.

The leu declined as much as 0.3 percent to 4.0716 per euro, near a four-year low of 4.0918 reached on Dec. 29. It traded at 4.0688 at 7:09 p.m. in Bucharest, compared with 4.0600 yesterday. Romania’s BET stock index rose almost 5 percent.

“The weakness of the leu was the main reason for the central bank to keep rates on hold today,” said Agata Urbanska, central European economist at ING Groep in London. “A further decline of the leu would mean a worsening situation of individuals and corporates who have loans in foreign currencies and this could deepen the economic slowdown.”

The Banca Nationala a Romaniei left the Monetary Policy Rate at 10.25 percent for a sixth month, saying it “will continue to closely monitor domestic developments and the global economic evolutions” to ensure “both price and financial stability.” Economists expected a cut to 10 percent, according to the median of eight estimates in a Bloomberg survey. Economic growth was 9.1 percent in the third quarter, compared with 9.3 percent in the three months through June.

Bucharest’s BET stocks index rose 4.8 percent, the most since Nov. 10, to 3,125.70, supported by climbing oil prices and bets borrowing costs will fall. Rompetrol Rafinare SA, Romania’s second-biggest oil company, jumped 15 percent to 0.0243 leu after crude prices advanced to a three-week high.

Rate Forecast

The central bank will lower its main rate by 50 basis points in February and the leu may weaken toward 4.20 per euro in the second half of this year, Urbanska said.

The leu declined 2.4 percent against Europe’s common currency over the past three months, compared with a 13 percent loss in the Polish zloty and a 6 percent drop in the Hungarian forint. The Romanian currency has been shielded from bigger losses by the highest benchmark rate in the European Union and speculation the central bank stepped into the market to buy the currency.

After years of growing prosperity that drew investment from companies including Carrefour SA, Ikea, Starbucks Corp., Nokia Oyj, and Ford Motor Co., Romania’s economy is slowing as the global crisis spreads to emerging markets.

Standard & Poor’s and Fitch Ratings have downgraded Romania’s debt rating to junk in the past two months, citing increased government spending among other reasons. Fitch lowered Romania two notches to BB+ from BBB, while S&P cut its rating on the country to BB+ from BBB-.

Economic Measures

The government of Prime Minister Emil Boc, approved by parliament last month, pledged to address the effects of the global slowdown on the Romanian economy with spending cuts and increased investment.

“Eventually the Romanian government is likely to turn to the International Monetary Fund for a more conclusive policy guidance,” Lucy Bethell, a London-based strategist at Royal Bank of Scotland Group Plc, wrote in a note to clients today. “In the interim the drip-feed policy measures coupled with currency weakness appears likely, leaving us unwilling to sell euro-leu at this point.”

Emerging-market currencies are poised for further losses as recessions force wealthier nations to rein in overseas investment, Morgan Stanley says.

One-third of the world’s wealth has been wiped out by the financial crisis and this will have a lasting effect on global consumption, wrote London-based Stephen Jen, chief strategist for emerging markets at the bank’s sales and trading arm. Foreign direct investment in the developing nations of Asia, Europe and Latin America is already starting to cool, he said.

Lira, Zloty

The Turkish lira rose 1.1 percent to 1.5143 per dollar, from 1.5317 yesterday.

The Polish zloty surged to a more than three-week high against the euro, rising as much as 3.7 percent to 3.9379.

Poland may join the exchange-rate mechanism for the euro in the first half of this year without changing its constitution first, said Zbigniew Chlebowski, the chairman of the ruling party’s parliamentary group.

President Lech Kaczynski told a news conference in Warsaw that “God only knows” what the best euro date for Poland would be. The government said last year its target date for joining the euro zone was the start of 2012, with entry to the obligatory pre-euro stability mechanism in 2009.

The Czech koruna strengthened 1.7 percent to 25.937 against Europe’s common currency, while the Hungarian forint rose 0.6 percent to 265.15 per euro.

To contact the reporters on this story: Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net

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