Capital Economics: Romanian currency depreciation to continue on prolonged political instability

The depreciation of the Romanian currency the leu will most likely continue until the country's Constitutional Court rules on the recent presidential impeachment referendum, pushed to September 12, according to recent analysis by Capital Economics. The Constitutional Court decision added a new layer of uncertainty to the political instability in the country, and investors' trust will probably continue to be affected, according to Capital Economics. "I am not sure how hard the RON will depreciate after the announcement. Romania's Central Bank has high reserves and could intervene to prevent a collapse of the leu,” said Capital Economics analyst William Jackson, quoted by Mediafax.

Several scenarios are possible, in Capital Economics' view. The best would be for all political forces to wait for the Constitutional Court decision in September, and ease the pressure on leu in the last part of the year. The court checking the electoral rolls would increase the credibility of the final decision and all parties would accept this, in this scenario. The most pessimistic alternative would involve new attempts from the Government to impeach the president, paralyze the country and the decision making process, as well as relaxing the targets of the International Monetary Fund program. A strong depreciation of the RON would follow in this scenario, analysts believe. The RON depreciated sharply since the beginning of July, by 4.2 percent, to a historic low of RON 4.65 for EUR 1. After steadying in the first part of the week following Sunday's referendum, the RON went down again on Thursday (August 2 ) on the money markets, after the Constitutional Court announcement. The referendum had an attendance of 46.2 percent, with 87.5 percent of the voters in favor of suspended president Traian Basescu's impeachment. editor@romania-insider.com