Romania’s national currency weakened by 0.27% against the euro on September 23, while the yield on 10-year government bonds rose to 7.44%, the highest level since last October, as investors continue to assess risks related to the country’s fiscal consolidation and political turmoil.
The market moves came as president Nicușor Dan and Finance Minister Alexandru Nazare met investors in New York, where the president sought to reassure holders of Romanian government bonds that fiscal consolidation would continue despite the political tensions at home.
The developments indicate increased investor caution over the potential deterioration of Romania’s macroeconomic outlook, although they do not by themselves point to expectations of an imminent sovereign downgrade. Romanian government bond yields have already incorporated a significant risk premium related to the political crisis, with investors still focused primarily on the ability of any new government to maintain fiscal consolidation and ensure smooth public debt financing.
“It is possible that certain foreign investors sold some of the lei-denominated bonds they held and exchanged those lei for foreign currency to withdraw from the Romanian market,” CFA Romania president Adrian Codirlașu told Agerpres, commenting on the developments.
“I would look at two events that I think are correlated. We had, on the one hand, the yields on government bonds that have been constantly increasing and now the 10-year maturity is trading at 7.44%, and at the same time a certain slight depreciation of the leu against the euro. So, combining the two events, certain foreign investors may have sold some of the lei bonds they hold and exchanged those lei for foreign currency to withdraw them,” Codirlașu said.
The National Bank of Romania set the reference exchange rate at RON 5.2788 per euro on September 23, up from RON 5.2647 a day earlier. The new rate was the weakest level of the leu against the euro recorded this year.
Codirlașu also said Romania had received messages from two rating agencies and two major investment banks stressing the importance of continuing reforms and putting the budget deficit on a sustainable path.
“Those investment banks are large holders of Romanian bonds. And now it matters if we can convince them that what has happened so far – reducing the budget deficit – is not reversible. This message of continuing fiscal consolidation is very important, and Parliament will give it,” Codirlașu said.
The 10-year government bond yield has risen from 7.20% on September 17 to 7.44% on September 23, according to market data.
The increase comes against a backdrop in which Romania remains under the EU’s Excessive Deficit Procedure, although the procedure is currently held in abeyance following the European Commission’s assessment in June that Romania had taken effective action. The EU nevertheless continues to require a substantial reduction in the deficit, while current fiscal and political uncertainties create implementation risks.
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