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Problem of exchange rate and currency market
Iurie Gotisan, April 15, 2007

The leu appreciated by nearly 4 percent versus dollar and more than 1 percent versus euro in the past three months. The appreciation of the leu versus euro and U.S. dollar seems to be excessive and unsustainable on long term and unbalances of economy could produce an abrupt depreciation soon.

Potential factors of influence:

  • Firstly, we consider that the evolution of the euro-dollar pair on international markets is a primary cause of appreciation, as the domestic market depends much on foreign market.
  • Secondly, we think that the slowing down of American economy could be also a factor of influence. It directly influences the domestic currency market, which is still relatively small and illiquid.
  • Finally, we shall not forget the money transfers[1] of those working abroad, which rose on holidays, when many migrant workers come back home or send money to families, influencing the exchange rate directly or indirectly.

We may affirm that the domestic currency market is facing a currency invasion, as increasing amounts enter it. We fear that there is a certain risk for two reasons. We are not psychologically prepared for something like that because we considered until now that we have everything and dollars or euros are the only thing we lack, but it is not so. We will find out every day that we actually lack managerial skills to be competitive, competitive production structures, even the capacity to lead a macroeconomic framework based on a surplus of currency. This excess of currency may create a grave problem to us, notably to boost the unemployment rate since both exporters and other domestic producers will be unable to handle the appreciation of leu and cheaper imports.

Effects of appreciation

Who are winners of a stronger leu…

It is probably premature to estimate the influence of a stronger leu versus main currencies of reference on population and economy in general, but the appreciation particularly advantages those earning salaries in Moldovan lei and willing to make reserves or save money by purchasing foreign currency or families who have debts in foreign currency.

It is simple – one pays fewer lei to reimburse a loan and has more money in pockets when the leu/dollar exchange rate drops (the leu grows). It is worth to note that the National Bank likes a strong leu because it helps reducing the inflation,[2] but exporters and Government doe not like it because it affects the external competitiveness of economy. At the same time, the appreciation advantages the Government, which buys energy agents like natural gas, for example.

In addition, the appreciation advantages importers because they will buy currency on domestic market for a better exchange rate than three months ago, for example. Exporters that suffered until now are affected.

…and who are losers of appreciation

Workers whose salaries are paid or calculated in foreign currency lose after exchanging them into lei. An excessive appreciation of domestic currency could affect very much the exporters, which do not enjoy good times, developing into a stronger growth of importers and outlining the disequilibrium in trade balance (the trade deficit for the first two months of the year was close to 300 million dollars). I think that both exporters and other domestic producers will be unable to handle the appreciation of the leu and cheaper imports that invaded the local market.

Economic reflections

I think that majority of economists show these wounds more clearly – increasing foreign deficits (of current account, trade deficit, etc.), which are a sensible perspective of improvement in the near future. The National Bank of Moldova (NBM) has guided its policy on a stability of currency, that means on a strong leu in the past years and it succeeded, but it seems to me that this was not in accordance with general interests of economy, with exports being affected most. I believe in skills and professionalism of NBM employees. I hope that the central bank will promote a flexible currency policy contrary to the directed policy, allowing exporters to breathe this way.

So, the problem of deficits doubled by probability of a decline of foreign investors, it means of the source of coverage of void from treasury (though updated data show that currency reserves of NBM reached 800 million dollars), is the worst one for health of domestic currency. An overgrowth of deficit of current account would raise questions of investors the risk of investing their money here because of macroeconomic disequilibrium. This means a possible exodus of capitals and a potential decline of domestic currency.

Expectations in this respect are pessimistic. The economy is overheated and any change of attitude of investors and a visible withdrawal of capital would press the exchange rate. Therefore, a sudden depreciation of leu would affect the capacity of reimbursement of those who borrowed foreign currency, and their number is high. NBM employees should think well here as well.

Currency forecasts

Leu could appreciate in continuation…

Making exact estimates is very hard because I hope that this move of exchange rate will temperate somewhere. I know that people need predictions and it is hard to explain in this context that we would rather make problems if speaking about a certain exchange rate. However, the central bank is the only actor capable to shaken the appreciation or depreciation of leu and I do not think that those relying on this thing only will gain. The leu may grow in continuation; we do not say no. Both capital inflows and people saving some of their money in foreign currency will have a contribution, as a change of portfolio is felt.

The appreciation of leu would be fuelled by big purchases at private exchanges or exchange offices of banks, which absorb the money of those working abroad or money from sales of real estate. Purchases (currency sales of population) from population by exchanges have grown nearly two-fold. Monthly currency sales were valued at about 140 million dollars in February 2005 and 260 million dollars in February 2007. Thus, the trend of appreciation was stressed by people who are trying to get rid of foreign currency.

However, here is the big problem – the deepening of trade deficit, a fact reflected on currency market where the demand exceeds the supply of lei almost everyday. Indeed, if those working abroad did not transfer money, the exchange rate of dollar would exceed 14 lei and of the euro would be at least 17 lei.

1 According to official statistics, more than 855 million dollars was transferred to Moldova in 2006, without taking into account the amounts transferred via couriers, transportation, etc. At the same time, estimates by IMF for 2006 reveal that 1.3–1.5 billion dollars, the equivalent of 50 percent of the GDP, was sent to Moldovan in 2006.

2 The managing board of the National Bank has recently decided to lower the base interest rate from 14.5 percent down to 13.5 percent a year, following the reduction of inflationist expectations.






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