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Romanian lei, world's best performer, may rise in 2007 on EU

Romania's lei surpassed all European currencies to become the world's best performer this year and is poised for more gains because foreign investment may double as the former communist dictatorship enters the EU.

The lei rose 20% against the dollar in 2006, passing a six-year high, fueled by investments from foreign companies including Erste Bank AG, Austria's No. 2 bank. Erste bought 62% of Romania's biggest financial company, expecting that joining the world's largest trading bloc on Jan. 1 will boost growth and living standards. "We expect further appreciation of the lei,” said Oliver Kastner, who helps manage the equivalent of $7 billion in emerging-market bonds at Deka Investment GmbH in Frankfurt, 5% of which is in Romanian debt. "There are a lot of investors currently unable to invest in Romania who will be able to do so following EU entry."

"Companies want to take advantage of the cheap pool of skilled labor on offer.” The lei traded at 2.5827 against the dollar on Dec. 8, falling 0.3% for the week, its first decline in five weeks. The lei may gain about 4% to 2.48 against the dollar by the end of 2007, said Beat Siegenthaler, a senior currency and fixed-income strategist at TD Securities in London. The country expects a record €8 billion ($10.7 billion) in foreign capital inflows this year, from €5.2 billion in 2005, the government estimates. Next year the government projects investment will rise by €10 billion.

Foreign direct investment totaled €4.9 billion in the first nine months of this year, from €3.7 billion a year earlier, the Romanian Central Bank, led by Governor Mugur Isarescu, said November 24. Less than 20 years after former dictator Nicolae Ceausescu was publicly executed and the world recoiled from televised images of 50,000 Romanian children living in unheated, filthy orphanages, the birthplace of Count Dracula is poised to join the common market of 500 million Europeans.

The leu broke its six-year record against the dollar on November 28 after Germany became the final EU member state to ratify Romania's entry. The extra yield, or spread, investors demand to hold Romania's euro-denominated bonds rather than euro-region benchmark government bonds fell to 43 basis points on December 8 from 58 basis points two years earlier, according to JPMorgan Chase & Co. indexes. Romania canceled all bond sales in the past year as economic growth eliminated the need to borrow. The benchmark cost of borrowing in Romania is 8.75%, compared with 5.25% in the US and 3.5% in the euro region.

Romanian stocks are also rallying in the run-up to EU entry. Bucharest's benchmark BET stock index has gained 22.6% this year, reaching a high of 8545.34 on November 1. Some fund managers say the country's current account deficit, the biggest in the region, threatens the currency should foreign direct investment dry up. The deficit may reach 10% of GDP this year, central bank Deputy Governor Cristian Popa said on October 5. "The leu won't benefit from the current strong FDI flows much longer,” said Margarete Strasser, who helps manage about $500 million in East European bonds for Capital Invest in Vienna.

"The government really has nothing else left to sell.” Capital Invest holds no Romanian government debt and doesn't intend to buy any. "It's too expensive given the development of the country and the size of the deficit,” said Strasser. Romania, a country of 22 million on the western coast of the Black Sea, will become the second-most populous east European member of the EU after Poland. The prospect of EU membership has already buoyed the $100 billion economy. Economic growth in Romania, where gross domestic product per head is about $5,600, a third of the EU average, will probably top 7% this year, the government forecasts. Prime Minister Calin Tariceanu predicted in September the economy may double by 2018, Mediafax news agency reported.

Erste Bank, which paid 3.75 billion euros on October 12 for its stake in Banca Comerciala Romana SA, expects 50% growth in retail loans, 40% to 45% growth in consumer loans and 65% to 70% growth in mortgage loans between 2006 and 2009, according to Erste central European spokesman Ionut Stanimir. "Romania is a gold mine for the development of Western companies who are facing growing competition in their own mature markets,” Stanimir said.

Foreign companies that have already invested in Romania include Austria's OMV AG, central Europe's biggest oil company; Renault SA, France's second-biggest carmaker; and General Electric Co.'s property unit, the world's largest real estate company. "Investment isn't going to go away anytime soon, especially as with EU accession Romania becomes a more attractive destination” for capital, said Andrew Colquhoun, a director in Fitch Rating's emerging Europe sovereigns group.


(BBJ 11.xii.06)

 
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