Romania’s forex reserves further ease in May despite low debt service

Romania’s forex reserves further ease in May despite low debt service
By bne IntelliNews June 5, 2018

The stock of international reserves at Romania’s central bank further decreased by €416mn in May to €33.12bn at the end of the month, the monetary authority informed. The development is negative in the context of rising imports and widening external deficits.

The decline occurred despite thin external debt service: €157mn, compared to the €1.7bn the central bank will have to service in June (when the reserves are thus likely to further decline). This was particularly unexpected given the strengthening of the US dollar, which is the currency of denomination for part of Romania’s international reserves, versus the euro in the month.

On an annual basis, the international reserves decreased by 6.6% y/y, or by €2.36bn in absolute terms, while GDP, exports and imports increased in nominal terms by double digit rates. Imports of goods soared by nearly 12% y/y to €77.5bn in the 12 months ending March.

Outflows of international reserves were reported at €2.6bn in May, but the central bank does not disclose detailed sources of the outflows or inflows. No major interventions by the central bank on the foreign currency market were reported, but constant moderate interventions might explain the steady exchange rate (despite a certain deterioration in bankers' expectations).

The local currency came recently under pressure amid a widening Current Account gap but also as an effect of expected fiscal slippage and the lack of regulatory predictability particularly on the fiscal policy side. The central bank is striving to lower the inflationary expectations, which remain a very important inflation driver for the quarters to come. But the political turmoil is adding uncertainty with a visible price. On the upside, a certain weakening of the local currency would allow a smooth correction of the Balance of Payments while indeed curbing the gains seen by households in terms of incomes (wages, pensions) over the past years.

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