Political unrest leads to a 2% drop in Romania's national currency.
Rewritten Article:
The National Bank of Romania (BNR) took a surprising turn on May 6, announcing a weaker official exchange rate for the local currency by 1.2% daily, with the Romanian Leu (RON) continuously losing ground and stabilizing around RON 5.1 to euro—a mere 2% of its previous strength seen over a prolonged period. The turmoil didn't cease in the secondary market, as 10-year government bond quotations rose significantly by almost 0.5 percentage points to 8.02/7.80 on May 6, a sharp rise since the first ballot of the presidential elections two years prior.
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Market turbulence is expected to persist for the coming two weeks leading up to the May 18 final presidential ballot. The underlying cause? Fear and uncertainties surrounding potential political instability and the likely election of George Simion, an isolationist presidential candidate, who won the first round on May 4.
Dragoş Cabat, member of the CFA Board of Directors and co-founder of Cabat&Pah Investments, offers an intriguing explanation, suggesting that "If the RON doesn't recover in the coming days, it implies that this is the moment the National Bank of Romania has been waiting for to depreciate the RON. The reason being: inflation in Romania has always been higher than that in developed countries [euro area], yet the exchange rate has remained constant for 5-6 years. Essentially, the country's currency has strengthened in real terms, and the [BNR] has been waiting for a trigger to let the RON depreciate."
The driving force behind the exchange rate pressure is certainly the sell-off of Romanian debt portfolios by foreign investors, expressing concerns brought about by the possible victory of George Simion—a move that could potentially challenge Romania's long-term public financing as well. Currently, foreign investors control an impressive 52% of the Romanian government bond stock, a figure that has significantly increased over the past five years due to widespread public deficits.
Initially, BNR maintained the exchange rate steady after the May 4 presidential ballot. However, the prime minister's resignation on May 6 further intensified investors' reservations about political stability, exacerbating the pressure.
In response to decreased capital inflows and increased outflows, BNR sought to temper the situation by attracting liquidity from the market and increasing interest rates. "Recently, a significant shift has occurred on the foreign exchange market. Capital inflows have decreased, and outflows have increase considerably. To counter these movements, liquidity had to be attracted from the market, and interest rates increased," explained BNR's spokesperson Dan Suciu.
Traders in the government debt interbank market reported a massive influx of sell orders, as one bank treasurer put it, "Even during the pandemic, it wasn't as bad as it is now. Everyone wants to exit! Foreign investors are crucial for Romania's economic growth, and they're leaving now."
The investors anticipate a potentially dramatic drop in the RON's value—as much as 20% under a pessimistic scenario—while a "positive" outcome of the presidential elections on May 18 could restore stability to the country's forex market, according to a JPMorgan research note cited by Ziarul Financiar. Under an optimistic scenario, JPMorgan expects either a 3-5% depreciation or a 15-20% depreciation for the RON. However, they also state that different results in the second round of the presidential election or a modification in Simion's rhetoric could alter these scenarios.
The isolationist candidate George Simion captured a landslide victory in the first round of the presidential elections on May 4, raising expectations of his triumph on May 18. His party, the Alliance for the Union of Romanians (AUR), proposes a governing strategy that involves gradually recovering, through fair compensation (nationalization), strategic companies such as OMV Petrom. Simion has also pledged to appoint Calin Georgescu, a popular far-right politician with extreme nationalist economic rhetoric.
- The political instability and potential election of George Simion as Romania's president have raised concerns in the finance sector, as foreign investors are expressing their reservations about the long-term public financing of Romania due to Simion's isolationist stance and his party's proposal for nationalization of strategic companies.
- The ongoing political uncertainty also has implications for the Romanian economy, with JPMorgan predicting a potential drop of up to 20% in the value of the Romanian Leu (RON) under a pessimistic scenario, while a more optimistic outlook suggests a depreciation of 3-5% or 15-20% depending on the outcome of the second round of the presidential election or any changes in Simion's rhetoric.
