Romania’s currency hits weakest level in five years

Romania’s currency hits weakest level in five years
By Iulian Ernst in Bucharest November 14, 2017

Romania’s currency weakened versus the euro by 0.9% w/w and by 3.9% y/y as of November 13, according to the official exchange rates published by the central bank. 

The country’s currency hit the weakest level since August 2012, and fundamentals show that unless a strong inflow of transfers from the European Union budget occurs in the coming quarters, the local currency will weaken further, even though a soft landing (toward a rate more in line with the fundamentals) remains the baseline scenario.

The exchange rate was nearly RON4.65 to the euro, versus more optimistic expectations from the the state forecasting body CNP of a RON4.56 average rate this year and RON4.5 next year followed by a slight nominal strengthening during 2019-2021 to RON4.5 to euro in 2021. 

Central bank officials also said on November 13 that there had not been a speculative attack on the currency, as hinted at by Senate speaker Calin Popescu Tariceanu. Indeed, the depreciation seen recently is driven by the widening Current Account (CA) deficit and by the uncertainty generated by the government’s income, fiscal and budgetary reforms. The currency has constantly depreciated (nominally) over the past three years as the CA deficit widened and regulatory predictability deteriorated.

One week earlier, the central bank said “it could not fight fundamentals” explaining that the currency weakening is an effect of the CA widening and, essentially, of the government’s income and fiscal policies. Central bank officials repeated on November 13 that the net imports of mainly consumer goods must be paid for somehow, implying that the monetary authority is ready to accommodate a weaker currency. In fact, the central bank explained earlier in October, when the money market interest rates begun to rise, that it would focus on smoothing the interest rates (at the expense of allowing higher volatility on the foreign currency market).