We believe the diminutive size of this cut in the face of massive decline in asset valuation reflects extreme currency fears; a very significant percentage of total Romanian consumption is Euro denominated. The ugly balance between supporting the Leu and sustaining growth has left Romania’ leaders in a potentially untenable position if external demand does not rebound in the coming months.
Romania is one of the many countries we’re following in Eastern Europe. It lit up our screens last year with a GDP of 9.1% in 3Q ’08, the highest GDP growth rate in Europe (east or west), yet the chart below confirms that Romania, like the rest of Europe, has experienced severe contraction. The BET is already down -29.7% from its high this year on 1/06, and closed down -3.26% today while the Leu is off 15% against the Euro and 26% against the dollar for the trailing 12 month period.
The government predicts GDP growth at 2.5% this year. The announcement of this rate cut by central bankers stated that they will actively target inflation between 2.5-4.5% this year, and will be releasing a 12-month calendar for upcoming rate decision meetings later this week.
Stock markets are leading indicators. Clearly, Mr. Market is telling us there is no way Romania prints the GDP number they officially “expect.”