Moldovan Leu Has Carry `Potential,' Commerzbank Says

By Emma O'Brien

Aug. 21 (Bloomberg) -- Moldova's leu, the world's second- best-performing currency of the past six months, is the ``undiscovered carry trade'' that will continue to extend gains as investors are lured to the highest interest rate in continental Europe, Commerzbank AG said.

The leu has gained 17 percent against the dollar and 15 percent versus the euro this year as the former Soviet republic's central bank raised the benchmark interest rate to 18.5 percent. Inflation in the nation of 4.4 million people, of which about 30 percent live below the poverty line, according to U.S. data, accelerated to a five-year high of 17 percent in May.

``Moldova is a real potential carry-trade market,'' Michael Ganske, head of emerging-markets research in London at Commerzbank, said in an interview yesterday. ``The currency will appreciate a lot as the central bank has a strong commitment to controlling inflation and they want to attract foreigners into the country.''

The free-floating leu added 0.4 percent to 9.6350 per dollar by 10:16 a.m. in Chisinau, Moldova's capital. It fell 0.5 percent to 14.2793 per euro.

While deposits are available to foreign investors through local banks and there are no capital account restrictions, the National Bank of Moldova has yet to observe any kind of carry trade activity, said Ganske, who visited the country last month.

``It offers real opportunities to small portfolios,'' he said from Belgrade, Serbia. ``The rates are definitely attractive for investors.''

Foreign Investment

In carry trades, investors borrow funds in countries with low rates of interest and invest them in places where the returns on bonds and bills are higher. Investors earn the spread between the two rates and take the risk currency movements will erase their profits.

Moldova's benchmark rate, at a seven-year high, compares with 16.75 percent in Turkey, 4.25 percent in the euro zone, and 2 percent in the U.S.

The country, which was part of Romania until the 1940s and now borders the European Union, saw foreign direct investment more than double in 2007, Ganske said. It is predicted to increase further this year after the government introduced a policy of not taxing corporate income on reinvested profits, he added.

Moldova's $4.2 billion economy grew 5 percent last year, buoyed by its chief exports of food, textiles and farm machinery. It has a current-account deficit of $250 million, according to the International Monetary Fund.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net