The restoration of stability to the EUR/ROL exchange rate with the help of the National Bank of Romania (NBR) is encouraging the market to ignore the risk of new corrections thereby maintaining its appetite for loans in euros and dollars.
At the same time, the increase in the volume of foreign currency loans is also encouraged by the relatively remote prospect of interest rates for ROL falling to below 10% any time before 2008-2009. These were the main issues debated at seminar organised by Ziarul Financiar and ING Bank entitled "When will interest rates on ROL loans reach single-digit values?"
In a recent statement, NBR governor Mugur Isarescu expressed his surprise at the fact that the market is not showing any signs of demand for foreign currency purchases that would cover the risk of a reversal to the exchange rate trend, despite the low quotations. "If you leave liquidity on the market, you can expect the market to do something with that money, such as buy dollars, for instance. However, I have seen no such thing. Even banks prefer to accept the lower rates offered by the NBR, without considering that the exchange rate trend might be reversed at some point and that they should have the risk covered in good time."
In this context, expectations of exchange rate adjustments have emerged based on speculation that the NBR is waiting for certain capitals to exit the market in order to tax them by raising rates. On the other hand, the governor said, "there are constant appreciation pressures." One thing is for sure: after that extreme volatility seen on the market between December and February, exchange rate fluctuations narrowed substantially in March and April and kept steady in May. Through its interventions, the NBR has indicated that 36,000 ROL/EUR would be the minimum acceptable rate - though there were no tests to establish a maximum acceptable level.
"The restored stability of the forex market has somewhat killed clients'' appetite for instruments that provide protection against foreign currency risk, after a surge in interest in February," said Radu Craciun, chief analyst at ABN Amro Romania. He believes that the companies are being kept in an ivory tower and could suffer from a sudden blow from a surge in ROL.
Daniel Daianu, an economist, says that exchange rate fluctuations should be induced by the NBR itself. "That speech about the ROL''s continuing to strengthen only serves to encourage lending in foreign currency. It''s like a self-fulfilling prophecy. But it doesn''t always have to be like this." He believes the foreign deficit will deepen, approaching 10% of GDP, at which time market sentiment will change.
Daianu also warned that banks might "suffer from a nearsightedness", due to "only looking at their own balance sheets, and not at the entire system."
"The growth in lending is far from small. We need to see where these credits are going because they are going to consumption primarily," he explained.
Under these circumstances, the attractiveness of ROL-denominated loans remains mostly hypothetical, at least until the market experiences a real episode of foreign currency risk.
"I don''t think we can say for sure when interest rates will reach single-digit figures, though I think it will happen before 2009, at least for the corporate segment given that interest rates are approaching 10% already," said Misu Negritoiu, ING Bank''s deputy general manager.
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