A controlled depreciation of the RON could eventually prove beneficial for the economy, as it will restore balance to the system and remove what we think are currently "over exaggerated fears" of potential threats to Romania's growth prospects, the analysts of the biggest Swiss bank, UBS, say.
This is a U-turn from UBS concerning Romania, after its analysts had been some of the most pessimistic when commenting on the risks that threatened the economy. In addition, UBS was among the voices that penalised Erste Bank, Banca Comerciala Romana's majority shareholder, for its exposure to Romania - deemed as having become too risky a market last autumn.
The main concern about Romania is the current account deficit that continues to go up, and reached one of the highest levels in the European Union. However, UBS says that the phenomenon was also noticed in most emerging economies, particularly in those that were converging with the EU: the lifting of all commercial barriers along with the increase in the available income make private consumption of imported goods increase, which in turn translates into a higher account deficit.
"We noticed this situation (which continues) in countries like Spain, Portugal and Greece, but the situation in Romania is different," UBS analysts say.
What do they feel is different? On the one hand, Romania applies a controlled floating exchange rate system, with the RON appreciating a great deal last year despite the increase in the foreign deficit because of capital inflows, which leads to foreign exchange risk for foreign investors.
On the other hand, the authorities gave the impression that they were ignoring the problem. Yet UBS again notes that the situation has changed recently with the NBR operating a significant raise of the key RON rate and indicating a focus of the monetary policy towards keeping inflation in check and slowing down economic growth.
A gradual decline of the RON is more likely to happen than a sudden drop, induced by the central bank. "We believe the Romanian economy is bound to continue converging with the EU, as the economy continues to grow, productivity improves and nominal GDP per capita gradually moves towards the EU average," UBS analysts explain.
UBS also believes that the Romanian economy is in a good fiscal position (with public debt to GDP at 12.4%, the fourth lowest in the European Union), which provides the government with reactive policies to overcome any problems that may arise from a sudden currency depreciation/ devaluation.
At the end of last year, UBS was among the three investment banks that won a tender and were entrusted with arranging an eurobond issue of up to 1 billion euros, which the Finance Ministry plans to release this quarter.
The syndicate also includes Credit Suisse First Boston and EFG Eurobank. The Finance Ministry receives assistance from Bulboaca & Asociatii, while UBS and Credit Suisse First Boston are assisted by Badea Clifford Chance.
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