Monday, September 17, 2007

The Leu Continues To Come Under Pressure

Romania's leu fell to a more than six-month low against the euro this morning. The leu in fact declined for a fifth consecutive day, extending losses after recording the biggest daily decline in almost two weeks on Friday. The leu fell 0.9 percent to 3.3905 per euro by 11:08 a.m. this morning in Bucharest, its lowest since March 5. This was a decline from 3.3599 late last Friday.

The leu is now the worst-performing of 26 emerging market currencies against the euro since mid-August.


Here is the one day chart I prepared for last Friday:




and here is the one month chart (again as of last Friday).



Basically the Romanian currency seems to be the weak chink that currency market operators have found in the emerging market defence system, and I feel that the decline in risk appetite will start to really show its teeth here. In this sense the issue is longer term and structural as my colleague Claus Vistesen explains here.

But there are short term "movers" of the situation. One of these is undoubtedly the climate, and the dependence of the Romanian economy on agriculture. In this sense it is significant - despite the fact that the most pressing problem the country is likely to experience in the mid term is an acute labour shortage as the effects of longer term low fertility and large scale out migration of working age population really start to bite - that Romania's unemployment rate rose in August as a drought that damaged most of the country's crops reduced the need for manual laborers to collect the harvest. The proportion of the workforce out of work rose to 3.9 percent, from 3.8 percent in July, according to data released by the National Labor Agency today.

A drought damaged four million of the six million hectares of crops planted in Romania this year, completely destroying at least one million hectares and reducing the need for workers.


The other big downward driver is the current account deficit. The Romanian central bank has said that the current account gap swelled to 8.97 billion euros in July, from 7.81 billion in June.
Posted by Edward Hugh at 11:23 AM

0 comments:

Post a Comment

Subscribe to: Post Comments (Atom)

Spotlight On Hungary

Welcome to the Eastern Europe Economy Watch Blog. By clicking the older posts link (at the foot of the page) you will be able to leaf through the normal chronological blog posts. But first we have our country of the month feature where we would like to present some charts which provide background data we hope will help the first time reader better assess and get to grips with the general argument being presented on the blog. Below you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.