Wednesday, July 14, 2010

Leu Weakens for 3rd Day on Concern Romania’s Economy to Worsen

July 13 (Bloomberg) -- The leu depreciated for a third day against the euro, headed for its biggest drop in two weeks, on concern Romania’s recession will be deeper than forecast as the government cuts spending and raises taxes to cut its deficit.

The second-poorest European Union country needs to extend its loan program with the International Monetary Fund until 2013 from a 2011 expiration if it is to emerge from the worst recession in 20 years, Ziarul Financiar reported, citing Finance Minister Sebastian Vladescu. The economy will probably contract more than 1.5 percent this year after the tax increase, he said.

“The deterioration of the economic perspectives reinforces our view that the leu has no upside potential left even in favorable global market conditions,” London-based analysts at Societe Generale SA wrote in a report today.

The leu depreciated as much as 0.4 percent and traded down 0.3 percent at 4.2609 per euro as of 5:10 p.m. in Bucharest.

Prime Minister Emil Boc’s administration raised the value- added tax last month to 24 percent from 19 percent and made more cuts to public-sector wages to secure further disbursements from an IMF-led 20 billion-euro ($25 billion) bailout program. The IMF wants the budget deficit to be 6.8 percent of gross domestic product or less this year.

Current Account

Bank of America Merrill Lynch lowered its outlook for the country’s 2010 economic performance to a 1.3 percent contraction from a previous forecast of a decline of 0.7 percent, according to a report yesterday that cited the reduction in government spending and increased VAT. The IMF and the government estimate the economy will shrink as much as 0.5 percent this year, after contracting a record 7.1 percent in 2009.

Romania’s current-account deficit widened to 2.87 billion euros ($3.6 billion) in May from a shortfall of 2.06 billion euros in April and a gap of 1.97 billion euros a year earlier because of smaller remittances from Romanian citizens working abroad, the central bank said today.

The Czech koruna ended three days of gains, dropping 0.3 percent to 25.392 per euro. Poland’s zloty was little changed at 4.066 per euro, erasing earlier losses of as much as 0.3 percent after an unexpected increase in inflation prompted speculation the central bank will raise interest rates. The Hungarian forint traded less than 0.1 percent stronger at 278.16 per euro.

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