Citibank Sees Romania's Leu at 4.18 per Euro at End-'09 vs 4.10 per Euro Forecast Earlier

“The presence of significant implementation risks associated with the IMF [International Monetary Fund]-EU supported economic program and the possibility of a rise in political noise ahead of Presidential elections in November constitute the key Romania-specific risk factors to our foreign exchange outlook,” Citibank said in its Emerging Markets Daily note. The bank sees the euro/leu exchange rate at around 4.22 in the third quarter, and at 4.18 lei per euro by year-end, or a real depreciation of about 9.0% in 2009.

The leu closed at 4.2500/2540 per euro on Thursday, dealers said.

In late March Romania reached an agreement with the IMF, the European Union and the World Bank on a 20 billion euro ($29 billion) loan package aiming to support its crisis-hit economy.

“In our view, Romania’s relatively shallow stock and bond markets are the key factors behind the leu’s disappointing performance as they prevent the country from benefiting from the recent equity and government bond market rallies as much as its neighbouring economies,” Citibank said.

However, the bank still considers a moderate leu appreciation by the end of this year possible as the real effective exchange rate has returned to its 2005 average and there should not be significant valuation concerns.

Also, the commitment of the biggest foreign banks in Romania not to cut their overall exposure to the country and to raise the capital adequacy ratio of their subsidiaries to 10% under the umbrella of the IMF-EU supported arrangement bodes well for external financing prospects, the note said.

($=0.6872 euro)