Thursday, December 9, 2010

Deutsche Bank Says Romanian Leu May Drop to 4.4 per Euro in 2011

Dec. 8 (Bloomberg) -- The Romanian leu probably will lose 2.3 percent against the euro by the end of 2011 as exports lack a competitiveness boost because of weaker global demand, Deutsche Bank AG said.

The national currency is expected to weaken to 4.4 against the euro by the end of next year from 4.3 now and reach 4.33 per euro in the next three months, Deutsche Bank London-based analysts Caroline Grady and Marc Balston wrote in a note to clients today. The Romanian central bank has a “limited appetite for appreciation” because of weak economic growth expected for next year as the country emerges from its worst recession on record.

Romania is struggling to recover from the economic slump as a government increase in a value-added tax and cuts in wages prolonged the 2009 decline into 2010 and boosted the inflation rate to a two-year high. The Balkan nation is relying on a 20 billion-euro ($26.5 billion) international bailout to stay afloat as its economy shrank an annual 7.1 percent in 2009 and 2.5 percent in the third quarter, reducing budget revenue.

“While Romania will probably take several years to make up lost output, with growth likely to remain weak through our forecast horizon, the country should now be on a more balanced growth path,” the analysts said in the report. “Some depreciation to offset the impact of the jump in inflation on the real exchange rate may be preferred, particularly given the loss in export momentum seen globally.”

Growth, Rate Outlooks

The International Monetary Fund, which is leading the loan, expects the economy to start growing in 2011, led by industry and exports. Deutsche Bank said the economy will probably contract 1.9 percent in 2010 and return to a growth of as much as 1.5 percent in 2011, matching the IMF’s forecasts. It sees a slowdown in inflation to 7.6 percent at the end of this year from 7.9 in October and to 4.1 percent next year.

The central bank will probably keep the benchmark interest rate at its record low of 6.25 percent to boost weak domestic demand, the analysts said. They also said investors should sell protection tied to Romanian five-year bonds in the credit- default swaps market and buy Hungarian protection.

“If Romania’s adjustment program remains on track, the aggregate fiscal adjustment achieved will certainly be impressive,” Deutsche Bank said. “The planned 2.5 percentage point adjustment in the structural balance in 2011 will be more than twice that of any other emerging economy.”

Hungarian Downgrade

The Hungarian government will rely on a package of measures to overhaul the economy that it plans to put forward in February to help avert a credit-rating downgrade to junk, Economy Minister Gyorgy Matolcsy said yesterday. Moody’s Investors Service cut the country’s rating to Baa3 on concern that the Budapest-based cabinet is plugging budget holes with “temporary measures” that won’t be sustainable.

Credit-default swaps are derivatives used to hedge against or speculate on countries’ or companies’ creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt commitments.

Deutsche Bank says Romania could seek a precautionary credit line from the IMF after the current agreement expires in May next year because the country “doesn’t face any of the problems identified by the IMF as barring a country from a credit line,” such as a sustained inability to access international capital markets, the need for large structural policy adjustment, an unsustainable public debt position or widespread bank insolvencies.

--Editors: James M. Gomez

To contact the reporters on this story: Irina Savu in Bucharest at isavu@bloomberg.net; Andra Timu in Bucharest at atimu@bloomberg.net

To contact the editor responsible for this story: James M. Gomez in Prague at jagomez@bloomberg.net

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