Monday, January 18, 2010

Leu May Gain on Romanian Budget, Commerzbank Says

Jan. 15 (Bloomberg) -- The leu may extend gains after Romania’s parliament approved a 2010 budget, increasing the chances that a $29 billion international bailout loan will resume next month, Commerzbank AG said today.

The currency is likely to strengthen to 4 against the euro “in the near future,” Germany’s second-largest bank wrote in a client note. That level would be a 2.6 percent appreciation from the rate of 4.1058 per euro at which the leu traded as of 5:10 p.m. in Bucharest. The leu has advanced 1.4 percent this week for the biggest appreciation among 25 emerging-market currencies tracked by Bloomberg. The currency is at its strongest since May 7 on an intraday trade basis.

The country may receive 3.3 billion euros ($4.7 billion) in transfers after lawmakers yesterday passed an austerity budget that cuts staff, freezes wages and trims investment. Teams from the International Monetary Fundand the European Union will review the bailout agreement between Jan. 20 and Jan. 27, Tonny Lybek, the IMF representative to Romania, said in an e-mail today. The new budget aims to narrow the deficit to 5.9 percent of gross domestic product from about 7.3 percent last year.

“The chances of success are high,” Commerzbank analysts including Lutz Karpowitz and Ulrich Leuchtmann


The leu has rallied 2.3 percent since a new cabinet was approved on Dec. 23, filling a political vacuum left in October after the previous government collapsed. The impasse meant the European Union’s second-poorest member was not in a position to come up with a budget that would meet IMF conditions for a revival of loan disbursements.

S&P on Jan. 13 said it may raise the outlook on Romania’s junk credit rating after a budget was approved. The country is rated BB+ at S&P, the highest junk grade.

“Nonetheless we have to keep our feet on the ground,” the Commerzbank analysts, based in Frankfurt, wrote. “The rate of inflation remains quite high at 4.7 percent and is likely to rise further in the course of the recovery. That is likely to limit the medium-term potential for a recovery.”

Prime Minister Emil Boc predicted yesterday that the economy will grow about 1.3 percent this year after a contraction of about 7 percent in 2009. He said the country will continue in recession in the first two quarters and recovery will come in the second half. The central bank last week unexpectedly cut the main interest rate

Drag on Growth

“While the approval of Romania’s budget is undoubtedly good news in that it should get the IMF program back on track, we doubt that it will do much to boost growth,” Neil Shearing and David Oxley, emerging-market economists at Capital Economics in London, wrote in a note today. “Regardless of the specific measures, the budget cutbacks themselves will weigh on growth.”

The Polish zloty gained 0.1 percent to 4.0448 per euro and the Czech koruna rose 0.2 percent to 25.950. Hungary’s forint eased 0.4 percent to 267.9 against the common currency.

To contact the reporter on this story: Piotr Skolimowski in Warsaw wrote. “Standard & Poor’s has already promised an improvement of the rating outlook. This means that the strong appreciation of the leu over the past few weeks was justified.” to 7.5 percent, the lowest since January 2008. Its borrowing costs are still the highest in the European Union.

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