Dollar pushes leu/euro exchange rate down. Economic analysis by Info-Prim Neo

The Moldovan leu has appreciated against the euro by about 5.0% during the last few weeks following the depreciation of the European common currency against the US dollar. Analysts avoid making forecasts about the immediate developments. On August 14, the leu/euro exchange rate reached the lowest level since end-May and the analysts speak of a collapse. “Since the start of this year, the euro has depreciated by 14% against the leu, but during the past few weeks it has suddenly decreased in value,” experts say. The official exchange rate at the start of August was 15.1499 lei per euro, but last weekend it fell to 14.3712 and many of the currency exchange facilities posted a rate of 13.90-14.00 lei per euro. The market reacted rather edgily. Some of the currency exchange facilities stopped purchasing euros and the banks continued to work with only small volumes of euros. The situation was much the same during the next week. The uncertainty is mounting and the owners of currency exchange facilities and banks do not want to risk. The exporters and Moldovans that work abroad and send money home as well as their families that benefit from remittances say that they suffer great losses. According to unofficial estimates, the losses amount to 1.5 million lei a day. The authorities say the exporters become less competitive on the markets where they deliver their products, but also on the home market, which is glutted with imported goods. The Government is also anxious. First Deputy Prime Minister and Minister of Economy and Trade Igor Dodon said that the Government and the Ministry of Economy and Trade are concerned about this situation. The foreign currency surplus on the market is rather large. The minister questioned the National Bank’s capability to cope with the foreign currency surplus, saying that they are now working on a new instrument for intervening on the foreign currency market. What the Government can do to temper the pressure on the foreign currency market is to issue bonds in foreign currency, financial analysts say. Other analysts say yet that the Government could resort to restrictions to control the foreign currency inflows, especially given that the new law that regulates the foreign currency market provides for safeguard instruments. The modification of the leu/euro exchange rate is a new challenge, especially on the back of the powerful appreciation of the national currency against the US dollar. In the first half of the year, the Moldovan leu has appreciated against the US dollar by 14.16% in nominal terms and by 18.17% in real terms. There is no common assessment of the developments on the foreign currency market. Some of the bank experts and financial analysts consider that the only reason for the appreciation of the leu against the euro is the sudden depreciation of the European common currency on the international market. Others say that the large inflows of capital (remittances, investments, loans), including with speculative character, also exert pressure on the market. The latter say that the depreciation of the dollar and euro on the Moldovan market is more marked than in other countries of the region owing to the larger capital inflows. The reassessment of the assets and liabilities of the National Bank of Moldova following the appreciation of the national currency in the first half of the year revealed a decapitalization of about 1 billion lei of the central bank. In 2007, the National Bank purchased large sums of dollars at a higher exchange rate than the present one. Now it has to indicate a much lower exchange rate in the balance sheet. Though a maximum reserve norm of 22% of the attracted means was reached early in August and important sums were immobilized, with the central bank purchasing large sums of foreign currency and sterilizing cash simultaneously, the appreciation of the leu could not be stopped. On the other hand, representatives of the National Bank and of commercial banks say that the only cause for the appreciation of the leu against the European common currency is the sudden depreciation of the euro on the international markets. “There is almost a perfect parity – the leu has appreciated by 5.0% against the euro, while the euro has depreciated against the dollar by 5.1% during August 1-13,” say the same sources. The US currency hit a record height for the last six months – 1.4698 dollars per euro. The exchange rate of the Moldovan leu is fixed by the central bank taking into account the position of the US dollar. The leu’s exchange rates against other foreign currencies are calculated according to the “cross” rate of the given currencies against the dollar. This way, the leu’s exchange rate against the euro is a calculated and not real rate, influenced by the general rules of the market economy. So, we cannot speak about a balance between the supply and demand of euros against lei. The modification of the leu/euro exchange rate is a consequence of the adjustment of the macroeconomic indicators in the United States and Eurozone, which modified the foreign currency market expectations of the economic analysts, as a result of which the relation between the supply and demand of euro against the dollar has changed. Consequently, the euro has considerably depreciated against the dollar and, respectively, against the Moldovan leu, the head of a commercial bank department said. “Any relative depreciation of a currency against another on the international markets is felt immediately on the Moldovan market, in relation to the leu. It happened so with the US dollar. Now it happens with the euro. If the Russian ruble depreciates against the dollar in the near future, the depreciation against the leu will be accelerated,” financial analyst Sergiu Gaibu said. The appreciation of the leu is not only a monetary problem, he says, as this is about the economy’s capacity to assimilate the currency capital and incorporate it into the real economy. But the further intervention on the currency market can have extremely negative effects on the economy, including a serious economic stagnation. The National Bank and representatives of the Government as well as financial analysts avoid making forecasts about the developments of the leu/euro exchange rate and say that it is very difficult to predict. Everything will depend on the “behavior” of the European common currency against the US dollar. There is considerable uncertainty on the foreign currency market. The banks, the officials, the companies and the people expect that the appreciation tendencies that are a growing reason for concern will turn into depreciation tendencies. They also expect the new instrument for intervention on the foreign currency market announced by the Economy Ministry.