NBR will continue to intervene on the market and could even choose to purge liquidity as often as twice a day, in order to alleviate pressure on the forex market, Mugur Isarescu, NBR Governor said yesterday.
He said he expected the exchange rate to stabilise and eventually drop. NBR's head explained that the current depreciation of the RON came as a result of the tensions on the international markets, and had also been fuelled by the very high budgetary spending at the end of last year. Isarescu added that the stock market decline supported the theory of volatile capital outflows.
"Starting from what is happening on the forex market, I believe the RON has the strength to rebound and that it will do so at some point. It is obvious the RON has been affected, that it did not take it well and suffered from the turmoil on the international and domestic markets," Isarescu said, who attended the launch of the project to revise the Sustainable Development Strategy at the Romanian Academy.
The euro neared 3.8 RON in Bucharest yesterday, the second day of turmoil on the international financial markets that affected the domestic market, as well. In just two trading days, the RON has thus lost 2.7% against the euro. Calculated since the beginning of the year, exchange rate depreciation stands at 4.6%.
The Bucharest Stock Exchange suffered severe losses, as well. The BET index, which gauges the performance of the top ten companies listed on the market, has lost more than 9% over the last two days, and stock market capitalisation has gone down by approximately 2 billion euros. The value of companies on the Bucharest Stock Exchange has dropped by over 8 billion euros.
Mugur Isarescu's intervention yesterday came after the speeches of NBR's vice-governors last week, who had also stated that the NBR was carefully monitoring the trend of the exchange rate, deemed as "alarming". According to the governor, the central bank has worked hard over the last few days and had a hard time attracting the excess liquidity on the interbank market.
The very high liquidity volume was generated by very high budgetary expenses over the last two months of last year.
"There is this bad habit of concentrating budgetary expenses over the last two months. The Finance Ministry showed that local authorities spent more than 1% of GDP. Such expenses in only ten days create an impact on the forex market."
Over the last two months of 2007, the budget quickly moved from a slight surplus to a 2.4% of GDP deficit, (2.7% of GDP if calculated according to EU's methodology), with the state spending over 3.5 billion euros more than initially scheduled. What was the official explanation for this? Most unexpected expenses in November and December were made by local authorities, which used the funds without the centralised control of the Finance Ministry.
The NBR has been intervening on the interbank market every day since the beginning of last week, trying to keep interests as close to the monetary policy rate (8% a year) as possible.
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