Experts comment on Kazakh National Bank expanding tenge-dollar pegged corridor

Yesterday, July 15, Governor of the National Bank of Kazakhstan Kairat Kelimbetov declared a new expansion of the pegged corridor of the tenge exchange rate from 170-188 tenge per US dollar to 170-198 tenge per US dollar. To quell devaluation fears, Kelimbetov also promised that in the next quarter the exchange rate would not climb above 190 tenge.

Several financial experts have already commented on the new development and shared their expectations of the year-end tenge exchange rate.

Vadim Iosub, a senior analyst at Alpari’s Minsk office, told Tengrinews that the exchange rate would climb to around 192 tenge per dollar by the end of 2015, forecasting that the tenge would keep depreciating at the same pace as in the first half of 2015. But he did not rule out the possibility of more negative changes under the influence of external factors. "Sharp changes in the external environment – oil prices, Russian ruble exchange rate, the Greek crisis, worsening of the geopolitical situation as a whole – can make significant adjustments to the baseline scenario," Iosub said.

He believes that the tenge exchange rate is more dependent on the performance of Kazakhstan's economy (undermined by the Russian crisis and cheap oil) rather then on the actual behavior of the US dollar. “Growth of US Dollar Index affects this to a smaller extent then depreciation of the Russian ruble and lowering of oil prices,” he said.

He generally supported the idea of loosening the corridor - the more flexible exchange rate enables Kazakhstan to accumulate fewer imbalances in its domestic economy under the influence of the external factors then the narrowly fixed exchange rate, he said.   

Almaty-based financial expert Denis Krivosheyev said that the market was likely to quickly climb to the ceiling of 198 tenge per dollar.

"The market will quickly win back the allowed space and will once again put a pressure on the national currency and manufacturers. It looks like the National Bank decided to chop off the tail in several takes. Given the situation at the world market for resources, things will become worse, and backward raw-materials-driven economies will be able to survive only with free floating rates. In the case of Kazakhstan, an additional incentive towards weakening of the tenge is its accession into the World Trade Organization (WTO), as well as its membership in the Eurasian Economic Union (EEU), which is running a devaluations competition mechanism at full speed," Krivosheyev said.

A Kazakh economist Olzhas Khudaibergenov, Director of the Center for Macroeconomic Research, shared his opinion on his Facebook page.

He said that the policy of increased flexibility of the exchange rate pursued by Kazakhstan’s central bank in the first half of 2015 and its promise to continue the policy in the second half meant that a one-step devaluation was unlikely, especially given the gradual weakening of the tenge over the past months which reduced the need for a one-step adjustment.

One-step devaluations are unpopular in Kazakhstan because the regulator resorted to them on several occasions in the past years with most recent of them being the 22% devaluation in 2009 and the 19% devaluation in 2014.

Taking the July 16 end-of-day Kazakhstan Stock Exchange rate of 187.05 tenge per dollar as a staring point he said that should the exchange rate climb 1 tenge a month to reach the ceiling of the corridor (198 tenge per 1 US dollar) by the end of the year, the devaluation would eventually amount to 5.9 percent. This would keep tenge-denominated deposits (interest rate around 10.5%) still more profitable than dollar-denominated deposits (interest rate around 3%) in Kazakhstan.

Khudaibergenov used this to illustrate his opinion that there is no reason to panic or urgently convert tenge savings into another currency.

His forecast is that the new currency corridor will hold “at least until the middle of next year".

He is not expecting a surge in the inflation rate in Kazakhstan as a result of the loosening of the exchange rate corridor. “Annual inflation will remain within the usual limits,” he said. Last ten years’ average inflation rate in Kazakhstan is 7.6%. 

By Tatyana Kuzmina and Dinara Urazova (Alisher Akhmetov contributed to the story)