Forex – The Flow Of Money

To understand, what is really decisive for the RON exchange rate, there are only two romanian gentlemen you need to know: Mr. Central Bank & Mr. Foreign Trade.

When the rata lunara for CHF-mortgages exploded in January 2015, affected homebuyers gathered at the offices of the romanian central bank (BNR) in downtown Bucharest to protest in the hope that the mighty bank could help solve the problems.

Well, the BNR can in fact influence the exchange rate, via the key interest rate. If it increases, the RON rises and is more attractive for deposits, but would endanger the recovery of the romanian economy; if the BNR is lowering the interest rate, as it did in recent months regularly, then it intends to boost the economy and takes into account a lower RON.

And the BNR can to a certain extent intervene in the market, sell some of the foreign currency she owns to buy RON in order to keep the EUR/RON exchange rate below 4.50 for example.

But to believe that BNR can substantially influence foreign currencies like EUR, USD or CHF is naive, these currencies are traded in amounts of trillions around the globe around the clock.

Besides, the development of a currency is not based exclusively on pure economic factors like interest rates or the debt-to-GDP-ratio. Political stability, as well as trust or mistrust are important determinants too.

So when the EUR lost a lot of trust due to the crisis in Spain, Portugal and especially Greece, billions and billions of EUR were transferred out of the euro zone into CHF of stable Switzerland.

The CHF was gaining so much in value that the swiss exports were in danger to collapse until the swiss national bank in 2011 decided to fix the CHF/EUR rate at the level of 1.20.

Practically, the swiss central bank printed CHF like crazy to buy EUR for billions at 1.20 into their accounts to stabilize the rate, even when the fair value of the EUR vs the CHF was much lower.

When the European Central Bank intended at the beginning of 2015 to print EUR to boost the economy in the eurozone to the tune of 60 billion EUR a month, the relatively small Swiss Central Bank couldn’t manage to buy even more EUR at a price clearly above value and gave up the 1.20 level.

That’s when the market forces took over and the CHF exploded vs EUR, USD and any other currency (like the RON) and the costs for romanian CHF-credits went through the roof.

If the swiss central bank hadn’t bought billions of EUR for years and kept the CHF at bay, this increase would have come up gradually since 2011.

So, in a way, the Swiss Central Bank helped romanian homebuyers for years to keep the rata stable.

Now, when the possibilities of the BNR to influence the EUR/RON or CHF/RON rate are limited, who else could manage this?

Let me introduce you to a much more powerful gentleman: Mr Foreign Trade. He is responsible for the flow of money into and out of the country.

If an economy have to import more goods and services than is able to export (as it is the case in Romania), we have a current account deficit.

In other words, Romania needs to buy more foreign currency than the country can sell in RON. This excess in demand leads to a decrease of the RON vs the currency of the foreign trading partners.

How can a country reduce this deficit? Well, basically by doing nothing, as it’s written in economic textbooks. A lower currency leads to reduced imports, since foreign goods are now more expensive, while foreign demand for the now cheaper domestic production increases and the export figures are rising – e voila: the account deficit shrinks and the exchange rate recovers.

As it is often with textbooks, the description is correct, but the practical reality is different.

So, Romania should boost the exports. For a better understanding, don’t think only of classic exports like selling a romanian tractor to Canada for example. Think about the flow of money. What brings foreign currency into the country? International tourists would do this and even the transactions of romanians abroad, sending home money via Western Union are booked as inflow, since the recipients are selling USD or EUR to buy RON.

Now, let’s face it:

  1. The possibilities to boost exports short term are limited, Romania has simply missed to build up a competitive export industry in most sectors that fit world standards. I would see a good chance in exporting agricultural products, I hope Romania do not miss this opportunity.
  2. Romania is not using the country’s potential to attract international tourists. One fact only: the Hungarian capital Budapest alone generates in this sector more money than the entire Romania.

Now you may think, if that’s true, how comes, that the RON was that strong in the period from 2004 to 2008?

The question is justified. The answer is again: Inflow of money – in the way of Foreign Direct Investments or FDI, the most important factor, when it comes to currency valuation.

In case you never heard of FDI, you certainly have a contract with Vodafone or Orange, two big FDI from UK and France. With FDI, not ‘only’ money is flowing into Romania but also knowledge or technology and on top of that, FDI generates jobs for the local population.

Therefore, one of the most important issues, a country like Romania should care, is to make sure, FDI is increasing. Not only in booming times, but especially in a harder economic phases. And here, Romania did a terrible job.

Flashback: the FDI in Romania was 10000 USD in 1990, but increased remarkably after 2000, passing 5 billion USD in 2004 and 10 billion USD in 2007. By 2008, Romania was almost on an equal level with Poland. The polish economy then attracted 14.8 billion USD, Romania 13.9 billion USD.

You see a pattern here?  Increasing FDI, stable or rising currency.

Then, when the financial crises hit the global economy in 2009/10, nobody was surprised, that the FDI figures took a dramatic turn to the south. In 2010, Poland fell to 8.9 billion USD, Romania lost even more to 2.9 billion USD.

After months of heavy interventions by the US Federal Reserve, the global economy was stabilizing and started to growth again. This was reflected in re-bouncing FDI-figures for 2011 in eastern Europe almost back to pre-crisis levels. The whole eastern europe? No, unfortunately not in Romania. Here, the FDI was further decreasing to 2.6 billion USD and Romania was falling even behind small neighbor Hungary.

The FDI was sinking, so was the RON vs EUR, CHF or USD.

The FDI figures for Romania since 2011 didn’t recover substantially and are still around 3 to 4 billion USD a year, far away from the 13,9 billions USD back in 2008.

I surely will not teach the Romanians how to increase FDI, since the Government is well aware of this important issue. But allow me to mention this observation I made personally by helping a foreign company to settle in Romania:

The efforts to boost FDI by Romania have an emphasis on cheap labor costs and low taxes, undoubtedly important issues. But low taxes are less helpful, when an foreign investor can’t generate a profit in the first place through the lack of money romanian consumers can spend, the costly bureaucracy, constantly changing laws and the malaise with the two big ‘I’, often experienced when dealing with local officials: In-transparence and Incompetence.

I sincerely hope, Romania will be able to come up to the potential the country has to offer and attract more FDI in the coming years. This would most likely have the effect of a stronger RON – and the monthly payments for the homebuyers, not only for those who protested at the BNR, but all around the country, would fall again.


Economic missteps are made not only in Romania, but all over the world. How once powerful companies lost track – and investors a lot of money – will be shown in the next chapter:

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