Romania’s leu may fall to the lowest level in more than three months as the government faces a no- confidence vote from political parties opposed to International Monetary Fund-backed austerity measures.
The currency may drop 2 percent against the euro in the next two to three weeks before the central bank acts to help avoid a repeat of the 4.2 percent decline that occurred in late June, according to London-based strategists at Morgan Stanley, UBS AG and Societe Generale SA.
“The potential dissolution of the government is the biggest risk” to the leu, said James Lord, an emerging-market strategist at Morgan Stanley. “The central bank would step in to protect the currency if it came under significant pressure.”
The opposition plans to call a no-confidence vote this month after the government decided to cut public-sector wages by 25 percent and raised value-added taxes. Unions are organizing a mass demonstration in Bucharest following similar protests that prompted the interior minister to quit in September.
The leu reached a record-low 4.4012 in June after the Constitutional Court rejected a planned cut in pensions. The government as a result raised the VAT to 24 percent to qualify for the next payment of a 20 billion-euro ($27.8 billion) IMF- led bailout.
The leu was trading at 4.278 against the euro yesterday in Bucharest. It has risen about 3 percent since the June decline as the IMF and the European Union agreed to disburse 2 billion euros. A government collapse may push it once again to between 4.3 to 4.35 per euro in the next two to three weeks, according to strategists at the three banks.
Romania is trying to prevent a weakening of its currency at a time when most of the world’s emerging-markets countries are concerned about containing their currencies’ gains. The JPMorgan Chase & Co. Emerging Markets Currency Index has risen 10 percent since May 25.
Brazil doubled a tax on foreigners’ investments in fixed- income securities and Thailand will remove a tax exemption for foreigners on income from domestic bonds. South Korea is planning an audit on currency swaps and options to check if banks are complying with restrictions on holdings.
Romanian policy makers will not allow the leu to go “much beyond” 4.35 against the euro, saidGaelle Blanchard, an emerging-market strategist at Societe Generale in London. “The key for the market is a smooth implementation of the IMF program.”
Boc is counting on a majority of 258 votes in the 471-seat Parliament. The Social Democrats and Liberals, who hold 213 seats, said they will try to persuade coalition lawmakers to back their plan. Boc survived a non-confidence vote by eight votes in June.
“We have seen other no-confidence votes on several occasions,” Koon Chow, an emerging-market strategist at Barclays Capital, said. “The leu should be stable in the short term because of the central bank’s interventions.”
The central bank, relying on 35.8 billion euros in international reserves, intervened in the first half to keep the leu “relatively stable” and prevent excessive volatility, Governor Mugur Isarescusaid on Oct. 5.
The bank doesn’t publicize its market interventions and the last known action took place in October two years ago. Isarescu declined to give the value of euro transactions carried out by the central bank.
Little Is Needed
“It doesn’t take much for the central bank to push the currency where they want it to be,” Morgan Stanley’s Lord said. “The central bank has no interest in allowing a major depreciation.”
Should Boc survive the second attempt, the leu may strengthen to 4.25 per euro by the end of this year and to 4.15 per euro at the end of 2011, said SocGen’s Blanchard. Letting the currency appreciate is also unwelcome because it may harm exports and jeopardize Romania’s recovery from the worst recession on record, she said.
The economy will probably decline as much as 1.9 percent this year after contracting 7.1 percent in 2009 as austerity measures choke demand. The IMF predicts Romania to grow as much as 2 percent next year.
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