Monday, January 11, 2010

Romania Leu Has Best Week in 9 Months on Rate Cuts, Politics

By Piotr Skolimowski

Jan. 8 (Bloomberg) -- Romania’s leu posted its biggest weekly gain in nine months and the country’s stocks rallied on speculation interest-rate cuts and a political breakthrough will spur growth in the European Union’s second-poorest nation.

The leu advanced 0.1 percent to 4.1639 per euro as of 5:56 a.m. in Bucharest, bringing its appreciation this week to 1.6 percent. Romania’s benchmark BET index added 1.6 percent today to 5,1078.03, its strongest close since Sept. 10, 2008. The gauge increased 8.3 percent this week, its biggest one-week climb since July 24.

Romania’s central bank unexpectedly reduced its key rate by 50 basis points to 7.5 percent on Jan. 5, the lowest in two years. Lawmakers approved Emil Boc as prime minister on Dec. 23, filling a more than two-month-old political vacuum. Within hours, the new government approved a budget, one of the prerequisites the International Monetary Fund set for resumption of a $30 billion bailout.

“The stabilization on the political scene is the key factor behind the rally this week,” said Gaelle Blanchard, an emerging-market strategist at Societe Generale SA in London. The rate cut “showed that the central bank is confident that the situation is really improving.”

The absence of political leadership delayed payment of part of the IMF-led loan and prompted Standard & Poor’s to warn the vacuum might lead to credit-rating downgrades. The IMF said on Dec. 18 that the fund’s board may meet in February to discuss resuming loan payments if Parliament approves a government and passes the budget.

Parliament is scheduled to vote on the new government’s budget by Jan. 15.

Near-Term Target

“Approval for the vote is likely to see the leu rally still further from current levels, with a level of 4 per 1 euro being an obvious near-term target,” Timothy Ash, the head of Europe, Middle East and Africa economics at Royal Bank of Scotland Group Plc in London, wrote in a note to clients.

Romania requires the funds from the international bailout to finance its budget deficit. The country is aiming for economic growth of as much as 1.5 percent in 2010 after an estimated contraction of 7.5 percent last year.

The central bank seems optimistic about achieving its inflation target and will probably reduce its main interest rate a further 1 percentage point to 6.5 percent by the end of 2010, Dmitry Gourov, an economist at UniCredit SpA in Vienna, said this week.

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