Roxana Chesoi, Bucharest
The Bulgarian Post
2007-04-28 09:03:01

The Romanian economy is giving signs of deteriorating its external balances, on the background of further real appreciation of the Romanian leu (RON) against the euro and the dollar.

The Romanian national currency marked this week its 140th birthday and it is slowly but surely going to its final days - by 2014, Romania plans to enter the euro zone, which will put an end to another national currency in the frames of the European Union.

An appreciating trend of the RON with rates of 0.3020 euro per leu in the last weeks from 0.3300 to 0.3700 and more, until the entrance of Romania in the European Union, decreased the price of imports. In this way it benefited the National Bank in its struggles to continue the disinflation process. However, there are potential risks entailed by this ongoing appreciation.

First, real appreciation has put great pressure on exporters who see their profit margin decreasing or even disappearing, due to the fact that their earnings in euro are not sufficient to cover the costs in lei. With these difficulties the exporters are facing, appears the risk of increasing the unemployment. Since wages are somehow rigid, some companies might be forced to restructure if they are not finding ways to adjust to the new loss of competitiveness.

And thirdly, one of the most important imbalances that tend to deteriorate towards unsustainable levels is the current account deficit, financed until now almost entirely from foreign direct investment and capital inflows. Romania's current account deficit for the first two months of 2007 soared by 166% compared to the same period last year to over two billion euro due to a widening trade gap, the central bank said last week.

However, if the balance of payments continues to deteriorate, as the current developments are showing, the National Bank might consider an intervention on the market.

At a press conference on Wednesday, Mugur Isarescu, the Governor of the NBR, drew attention to the fact that the possibility to reverse the trend of the leu/euro exchange rate should not be ignored.

A depreciation of the RON nowadays would also prove problematic for the population – having contracted credits in foreign currency, as the cost of euro would be higher.

Raiffeisen Bank suggests, in its April report on Economy Overview on Romania, that a correction of the real appreciation of euro could be seen later in the year

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