Romanian currency slides to historic low amid economic tensions

Source: Xinhua| 2019-01-12 06:44:24|Editor: Mu Xuequan
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BUCHAREST, Jan. 11 (Xinhua) -- After sliding softly for three consecutive days, Romanian currency leu reached on Friday a historic low of 4.6782 to a euro, reflecting tensions in the economy.

Although the Romanian currency lost only 0.3 percent since the beginning of the year, financial analysts foresee a tendency toward leu depreciation this year, reflecting economic imbalances, slowing economy, expansionary fiscal policies and widening deficits.

"Though the actual depreciation of the leu was only a mere 42 pips compared to the previous day, it still made it into the breaking news of the main domestic news channels. The turnover remains above average, but it doesn't necessarily look one-sided. Regional currencies have been on an appreciation path lately, which likely helped the Romanian leu to avoid a more significant depreciation," said Ciprian Dascalu, ING's chief economist for Romania, in a note to investors.

Analysts feel that the controversial fiscal measures taken by the government in the last days of December have complicated the monetary policy framework.

A banking tax linked to the level of ROBOR, the benchmark for rates at which Romanian banks are prepared to lend to each other, "reduces the independence of the National Bank of Romania (NBR) in implementing its monetary policy because any potential hike in the policy rate should be now considered in the context of additional burden placed on the banking sector through the banking tax," noted Eugen Sinca, chief economist of the Commercial Bank of Romania.

According to an emergency ordinance, Sinca explained, banks will be required to pay a quarterly tax on their financial assets if the average between ROBOR 3M and ROBOR 6M exceeds the reference level of 2 percent, with tax rates ranging between 0.1 percent and 0.5 percent. Details are scarce at this moment which increases the uncertainty about the near-term outlook for the banking sector and also for the NBR's monetary policy.

Adrian Codirlasu, the president of CFA Society Romania, told Xinhua that since the launch of the emergency ordinance, the risk premium has risen, reflecting the worries of investors. Apart from the financial system, the biggest energy and telecoms companies are also subject to discretionary taxing. Those companies are supposed to make huge investments, but the new taxes could slash more than half of their profits.

On the other hand, the analysts are concerned that the ordinance may slash the independence of the central bank, as it altered the power of its intervention on the market.

Governor Mugur Isarescu said on Tuesday that the new fiscal measures could reduce the efficiency of the monetary policy as it arbitrarily introduces a reference level of ROBOR in the market. Money market rates are paramount for the transmission of the monetary policy in economy and the entire mechanism should not be altered, he said.

"A key question in 2019 is how the NBR would respond to potential weakening pressure on the leu coming from twin deficits and exacerbated by government's preference for low interest rates. We continue to favor the scenario of a modest depreciation of the leu (2-3 percent), with the exchange rate potentially playing the role of a relief valve for easing pressures in economy," said Eugen Sinca in a note to investors.