Friday, January 21, 2011

Romania Bonds to Rally on IMF, Inflation, SocGen Says

Romanian bonds are poised to extend this month’s gain because the country will probably take a loan from the International Monetary Fund, forcing it to stick with spending cuts, and inflation may slow, Societe Generale SA said.

Investors should buy leu-denominated debt maturing in April 2015 at a yield of 7.14 percent or above, before it drops to 6.70 percent, the French bank wrote in a report today.

Romania may take a loan from the IMF in April, President Traian Basescu said on Jan. 5. Thecredit line may be about 3.6 billion euros ($4.7 billion) and tapped in case of an emergency, Mediafax newswire reported this month, citing unidentified government officials. The European Union’s second-poorest member relies on a 20 billion-euro bailout led by the Washington-based lender to stay afloat.

“It is likely that a new precautionary agreement will be signed,” and this “will add credibility that fiscal consolidation will remain on track,” analyst Monica Nania at Societe Generale’s unit in Bucharest wrote.

The yield on the 6 percent bond fell to a record low of 7.11 percent Jan. 11 from 7.4 percent at the beginning of the month after the government said on Jan. 4 it reduced the 2010 budget deficit to 6.8 percent of gross domestic product, a limit set out in its loan agreement with the IMF. The yield was 7.2 percent at 5:40 p.m. in Bucharest, data compiled by Bloomberg show.

Deficit, Inflation

Prime Minister Emil Boc’s administration cut public wages by 25 percent last year and raised the value-added tax to 24 percent from 19 percent to bring down the deficit from 7.2 percent of GDP in 2009 after a recession eroded budget revenue. Boc plans to cut the shortfall to 3 percent by 2012.

If implemented, the austerity program “would reduce gross borrowing requirements in the medium term, which should in turn offer support to bonds with longer maturities,” Nania wrote.

Inflation accelerated to 8 percent in December, the highest annual rate in more than two years, as the increase in VAT in July boosted prices. With the effect of VAT changes on prices dwindling, the inflation rate will likely decelerate to less than 4 percent by the end of 2011, according to Nania.

To contact the reporter on this story: Krystof Chamonikolas in Prague atkchamonikola@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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