Kazakhstan considers de-dollarizing its economy

The Government of Kazakhstan and the National Bank made a joint statement, published on 24 December and available on Prime Minister’s website, a Tengrinews correspondent reports.

The statement highlights the deteriorating external factors in 2014, such as “general slowdown in the world economic growth and escalating geopolitical instability in the context of the Ukrainian events,” sanctions reciprocation between Russia and the West, leading to a “drop in growth in Russia and destabilization of the macroeconomic situation.”

These circumstances required a coordinated response of policy-makers, in particular in the financial sector of Kazakhstan. The priority directions in 2015 “will be the enhancement of the role of the national currency (tenge) in the economy, stimulating the growth of tenge liquidity in banks for further increasing of lending of the economy, recovery of the banking sector,” the statement said.

Accomplishing this involves a set of measures by the National Bank, part of which is aimed at de-dollarizing the Kazakh economy.

Most importantly, the statement said that sharp exchange rate fluctuations would not be allowed. Interest rates on deposits in dollars would be lowered. The maximum recommended interest rate on guaranteed deposits in dollars would be decreased from 4% to 3% per annum. In addition, setting prices of goods and services in currencies other then tenge would be banned.

To increase the role of the national currency in the economy the National Bank intends to stimulate savings in tenge by increasing the size of tenge deports eligible for guaranteed payout from Kazakhstan Deposit Insurance Fund (is case of the bank failure) from 5 and 10 mln tenge.

Kazakh economist Olzhas Khudaibergenov analyzed the key points in the statement. He said that since the government made it clear there would be no sharp fluctuations in the tenge exchange rate, i.e. no new devaluation of the tenge, all the state companies would stop buying up more foreign currency than they need and would sell the excess purchased when expecting a new devaluation. This would create a back pressure and strengthen the tenge.

“This is the right thing to do if the state really wants the private sector and the general public to trust the tenge, it must demonstrate this trust by own example. In general, this is the initial important step towards de-dollarization," he says.

On the whole, Khudaibergenov noted that the joint statement was quite general and contained but a few concrete measures. There are other steps the government needs to take in order to de-dollarize the economy, he said.

To begin with, Kudaibergenov is certain that it would be crucial to de-dollarize the banking sector. He said that increasing the minimum reserve requirements on foreign currency would make accepting new dollar/euro denominated deposits and keeping the existing ones less profitable for banks, forcing them to lower the interest rates on deposits in foreign currency.

At the same time, minimum reserve requirements on tenge liabilities had to stay the same. 

Khudaibergenov said that the National Bank of Kazakhstan could introduce certain measures to make lending in foreign currencies unprofitable. For example, banks could be ordered to add provisions in the amount of 20 percent of the loan amount, signifying an increased risk of non-repayment of the loan due to a mismatch in the currency of income and the loan currency.

To de-dollarize deposits, the joint statement provides for reduction of maximum recommended rate on deposits in foreign currencies from 4 to 3 percent. Khudaibergenov thinks 2 percent is even better. Moreover, the banks can raise their rates on tenge deposits from 10.5 to 12 percent.

The resulting difference in the interest rate on deposits in tenge (12 percent) and those in dollars (2 percent) should push Kazakh nationals and companies towards going back to tenge.

As an additional incentive for switching from foreign currency deposits to tenge, the guaranteed amount on tenge deposits can be raised to 20 million tenge (in the statement it is increased to 10 million tenge).

Attention should also be paid to currency exchange offices. And this is more about their ability to be the carriers of rumors.
“When rumors about the devaluation spread, some exchangers excessively increased their spread. They are interested in inflating the rumors, because the bigger the spread and the larger the rumors, the more profit they make,” the analyst says.

To tackle the situation Khudaibergenov suggested introducing a requirement by which exchange offices would have to indicate the weighted average rate, based on Kazakhstan Stock Exchanges’s last two sessions - morning and afternoon. 

"The second number the exchanger shall indicate is the commission it charges, which can range from 0.5 to 1 percent. This way people will see the same rate in all the exchangers and the fee each exchanger charges,” Khudaibergenov said.

He also proposed to order banks to open around the clock exchangers, depriving the non-bank exchangers from the possibility to gamble on the exchange rates.

The last but the most important measure, in Khudaibergenov’s opinion, is to gradually translate all foreign currency loans into tenge. The process should start from mortgage loans, he said.

"This will require some spending of the part of the National Bank, and therefore require detailed calculations and coordination. But in general the process of de-dollarization will allow increasing reserves and recouping all costs to reduce the volume of foreign currency loans," Khudaibergenov concluded.

In the statement the National Bank and the government promise to stimulate the growth of tenge liquidity of banks to further increase the lending to the economy. This will be done by considering a temporary reduction of certain provisions of the prudential regulation where necessary. Moreover, preventing liquidity shortage in commercial banks will be possible by providing them with tenge liquidity.

The reduction of bad assets (overdue loans) in Kazakh banks will continue. In addition, the authorized capital of the Fund of Distressed Assets - an entity called to bail out bad loans from banks to improve their performance - will be increased by another 250 bln tenge. In regulatory policy, Basel III capital adequacy standards will be gradually introduced. The National Bank will monitor the implementation of the new capital adequacy standards based on the unfolding economic situation.

Meanwhile, we just need to wait and see what happens.

By Dinara Urazova