Bullish on the Romanian leu for next month: strategist

Assets in Romanian leu (RON), whether local bonds or the currency itself, will be "a firmly positive story" over the next month and a half, a strategist says

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“We believe that the recent small rebound in EUR/RON offers an interesting opportunity to reestablish a bullish RON position,” Guillaume Salomon, emerging markets strategist at Societe Generale, wrote in a report.

With tensions around elections – which took place in early December - now “well behind us,” the outlook for the Romanian currency has turned much more positive since the beginning of the year, according to Salomon.

He believes that the inclusion by Barclay and JP Morgan from March of Romanian domestic bonds in two major emerging markets local currency bond indices “is a firmly positive factor for RON assets,” which could see “several billion” of US dollars flowing in.

Salomon sees other factors that support his bullish view.

For one, macroeconomic fundamentals “have stabilized and growth is expected to rebound in 2013 following a dismal performance in 2012,” he said.

The current account deficit is expected to remain at “sustainable levels” of around 4% of gross domestic product over the medium term and the central bank will have a “relatively hawkish stance” by regional standards, preserving the appeal of Romanian assets for investors looking for yield.

However, there are caveats.

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Romania has asked the International Monetary Board (IMF) for an extension of three months of its precautionary Stand-by Agreement, to give it time to implement delayed reforms such as cutting the government’s payment arrears and privatizing some state-owned companies.

Salomon expects the IMF board to approve the extension and the country to sign a new precautionary Stand-by Agreement in June when the current one would end according to the new schedule.

But a new agreement with the Fund, “while desired, is not fully guaranteed,” as IMF officials said discussions about a new deal would only take place after the current one is completed and the government has implemented the reforms, according to Ionut Dumitru, chief economist at the Romanian branch of Raiffeisen Bank.

“As time passes, we would not rule out a scenario of not signing a new program with the IMF. There could also be administrative issues about a new program (type of program, participation of the European Commission),” Dumitru said.

But, he added, “a failure to sign a new deal might not be the worst thing to happen, provided that authorities avoid fiscal slippages and remain committed to structural reforms.”