Leu May Weaken to 4.35 Per Euro on Increased Romanian Austerigy, ING Says

Romania’s leu may weaken 2.6 percent versus the euro within three months because more austerity measures are needed to narrow the nation’s budget deficit and the recession may last another year, ING Groep NV said.

The currency is poised to depreciate to 4.35 per euro from 4.2350 as of last week’s close, Nicolaie Alexandru-Chidesciu, an ING chief economist in Bucharest, wrote in a report dated today.

Romania, which is relying on international loans to stay afloat, raised the value-added tax to 24 percent from 19 percent in July and cut public wages by 25 percent to narrow its budget gap to within an International Monetary Fund-mandated target of 6.8 percent of gross domestic product this year.

While ING doesn’t rule out the possibility of some leu appreciation in the next year, “any such move would be temporary and reversed quickly as it may not be justified (again) by fundamentals,” the analyst wrote. “It will not be easy to lower the budget deficit unless additional measures are adopted to address pension system issues.”

Gross domestic product contracted an annual 0.5 percent in the second quarter after a 2.6 percent drop in the previous three months, according to preliminary data from the statistics office in Bucharest.

“The economy is also expected to remain in recession for a year from now while others in the region grow,” ING said. “There are no strong reasons to expect leu strengthening versus the euro.”