Currency market overheated by money from abroad

The enormous inflow of foreign currency in Moldova lays much pressure on the currency market, the national coin's exchange rate and inflation. The currency market is on the verge of explosion. During the first 5 months of this year, the turnover rose to $3.45582 billion and if the trend goes on, the coming three months it will reach the level of the whole 2007. The growing rhythm has risen almost three-fold. In in 2007, the value of transactions rose by 25 % compared to 2006, in January-May 2008, the growth has been 70.4 %. The turnover of the currency market was close to $1 billion ($961.1 million) in May and reached the record high, which one year ago seemed to belong to the Science Fiction area. In May, the traded volumes rose with over $10 million on daily average and rose to a daily average of $50.58 million, compared to $25.56 million, in January, according to the National Bank of Moldova. Even more robust – by 10.5 times – have the transactions with Russian rubles risen on the Moldovan currency market, a development seeming hard to explain both by bankers and economists. From a turnover equivalent to $21 million in the first month of the year, the Russian rubles reached an equivalent of $220.6. This explosive development of the transactions with Russian rubles and the relative repulsion for the exhausted US currency has led to changing the hierarchy of the currencies on the market. If in January, the weight of the US dollar in the total of currency market transactions stood at 61.96%, the euro – at 32.34%, and the Russian ruble held a share of 4.57%, five months later, the dollar dropped to the level of 54.23%, the euro – to 22.32%, while the Russian ruble rose to 22.95% and overcome the euro for the first time. The natural question is: what is going on on the currency market? How this fulminant growth shall be explained? What could the consequences be? Both banking factors and experts believe the currency market is driven strongly ahead by a range of factors: - the currency transfers grow rapidly, the Moldovans working abroad have sent home, within 4 months, by 64.2% more than in 2006, the transferred sum getting close to almost $1 billion; - the external trades are on a rise, getting close to $2 billion, within only 4 months of 2008; - although there is no more recent statistics, the officials say also the inflows of foreign investments are huge, almost doubling; - the portfolio investments increase; as well as the money offered by different world financial entities WB , EBRD, EIB etc. which went into the accounts of the local banks; - more and more foreigners bring money to Moldova depositing it in commercial banks, which offer generous interests, much higher than in other countries in the region. Apparently, the considerable hike of the turnover of the currency market is not of concern for the central bank. Its Governor, Leonid Talmaci, told a round round table, held last week at the MNB, that the turnover was rising because of the rising remittances and external transactions operated by Moldovan companies, while the transactions with Russian rubles have considerably grown because the Moldovan wine exports to Russia have grown. “Do you know what was the weight of the US dollar in the transactions of the Moldovan companies two years ago? 84 %. What is it today? 54 %. Has anything happened? I don't see any problem here. It is the currency risk of the bank or of the company or the natural entity,” the MNB Governor said. The National Bank also says the foreigners' deposits in the Moldovan banks are small, and, on the other hand, they are monitored in order not to let the situation destabilize “in case they are withdrawn spontaneously”. Yet a number of analysts assess the foreigners' deposits are larger than believed and that the foreign speculators lay pressure on the market, and in case they go on being lured by the interests of up to 23-24% on deposits in lei and 13-15 % on deposits in euros or USD, there could be the risk of the market getting destabilized. It is not to be excluded that the importers would buy in more currency for future transactions, in the conditions in which the dollar is much cheaper on the domestic market, than it was a year ago, but also the euro's exchange rate is smaller. Buying cheap currency today, they hope to diminish the costs of imports and obtain profits in the future. As for the ten-fold growth of the turnover in rubles on the Moldovan currency market, even if we admit this hike has been triggered by the wine exports hike and by the remittances from Russia, where over 50 % of the Moldovan workers abroad work, there are still many questions without answers. One can only suppose that many companies, which used to trade with Russia in USD, now have renounced to this and prefer the Russian ruble. Or, that the Moldovans working in Russia started to save rubles. Some analysts do not exclude the question is about legalizing the capital. The question can be about speculative capital, too. What is certain is the expectations of both the Moldovan National Bank, and of the International Monetary Fund earlier in 2008 as to the stabilization of the inflow of foreign currency into the country have not confirmed. Bank factors and independent experts hesitate to make clear forecasts as to the consequences of the further growth of the currency market, which still does not seem to be overheated, but in case the moves undertaken by the National Bank (increasing the norm of compulsory reserves, the exchange rate) do not have the expected result, the results could be mostly lamentable. Some dare even to say the leu might fall, and almost predict a financial crisis. Even more cautious are the MNB officials, who say there are no grounds for concern. The effects could be felt even sooner than we expect, in case the trends of robust growth go on on the currency market, as they did during the first 5 months.