Experts comment on Kazakhstan's decision to abandon control of tenge

Kazakh and foreign financial experts have commented on the recent decision of Kazakhstan to stop defending its tenge and send it floating, Tengrinews reports.

On August 20, Kazakhstan’s Prime Minister Karim Massimov and the central bank Governor Kairat Kelimbetov announced that Kazakhstan had renounced control of its currency  in response to low prices for oil and metals, Kazakhstan’s main exports, and slowing economic growth of its two largest trade partners Russia and China.  

“From August 20 the National Bank and the Government have decided to implement a new monetary policy based on inflation targeting and to renounce the earlier practiced currency rate band,” the country’s PM Karim Massimov said in the government sitting on Thursday.

The exchange rate will now be determined by the demand and supply at the FX market, but the National Bank will still make currency interventions should Kazakhstan's financial system come under threat of destabilization.

Experts are not very optimistic about what is going to happen next.

According to a Kazakh financial analyst Zharas Akhmetov, by floating its tenge Kazakhstan repeated the Russian scenario. “They had a pegged corridor, then they abandoned it. After that, the exchange rate has been constantly fluctuating. To keep the situation under control, Russia set an extremely high discount rate (the highest among G20 nations). As a result, they have a high inflation rate and a decline in production. We are going to face the same,” he said.

In an interview to Kursiv, analyst at Alpari Investment Company Anna Bodrova said that free-floating exchange rate was suitable only for diversified economies less prone to outside risks. “Suppose that Kazakhstan is not vulnerable to external shocks. But it is still not a diversified economy. Kazakhstan has long been an export-oriented country. And it was not a good idea for the National Bank of Kazakhstan to adopt the new economic policy now. In the end, it will be people who will bear the costs of this initiative, same as after any one-step or gradual devaluation. The tenge has weakened by 31 percent against the US dollar since the beginning of the year. Given the current prices for oil, the fare exchange rate would stand at 200-235 tenge per 1 dollar. The rest is the reaction of the market and investors that did not expect the new monetary policy to kick in,” she said.

According to Anna Bodrova, the move to send the tenge floating hit the retail and services sector the most, while mining and processing industries were the most protected ones under the circumstances.

Financial analyst Vadim Iosub, also from Alpari Investment Company, said that new risks came from the FX market players and the population that were used to having a fixed exchange rate. He believes that “in the nearest future, the dollar will be traded at 200-230 tenge given the strict monetary policy carried out by the National Bank”.

Kazakhstan became the latest emerging market (along with Vietnam, Brazil, Malaysia and Turkey) to relinquish control of its currency after China, where the yuan lost 4 percent of its value.

According to RBK, “devaluation of the tenge was unavoidable” amid the sliding oil prices. “The recent devaluation of the yuan that prompted the slump of the currencies in a number of emerging countries acted as a catalyst (for the devaluation of the tenge). China accounts for 20 percent of Kazakhstan’s exports and to maintain the competitiveness of its economy, Kazakhstan had to compensate for the impact of the Chinese devaluation. The same with the ruble,” the Russian outlet wrote.

“The upcoming toughening of the US monetary policy put an additional pressure on the currencies of emerging countries currencies,” it said.

In fact, all markets around the world have been waiting for the moment when the US Fed will raise its interest rates since last year when it canceled the quantitative easing program. It is of particular interest to the emerging markets that might end up under a big pressure because the hike in the US interest rates would increase the volatility of their currencies and require monetary interventions.

Tommy Ong, Managing Director for Treasury and Markets at DBS Bank Hong Kong, believes that the tenge devaluation “was a move to prepare for the upcoming hike in the US interest rates”. In its wake many emerging economies decided to weaken their currencies to boost exports and contend any potential external shocks.

RBK also quoted emerging markets analyst at Nomura Timoti Ash, who said that “the devaluation of the tenge draws attention to the currencies of post-Soviet countries, including Azerbaijani manta, Armenian dram, Georgian lari, (Ukrainian) hryvnia and (Russian) ruble that might all again come under pressure”.

“People in the CIS countries apparently will be anxious taking into account what is happening now with the commodity prices and regional politics,” he added.

Chief currency strategist at Sberbank CIB Tom Levinson emphasized that Kazakhstan’s decision came as a response to the weakening Russian ruble, which lost half of its value over the year and pushed Kazakh producers out of business because the Russian alternatives of their goods became cheaper and hence more attractive. The recent devaluation of the Chinese yuan also affected Kazakhstan in a similar way, he said.

Chief Economist on Russia and CIS at Bank of America Merrill Lynch Vladimir Osakovsky thinks that had Kazakhstan delayed the transition to the floating exchange rate, its economy would have suffered heavy losses. According to him, Kazakhstan had to introduce a ban on Russian imports, because the domestic products were out of competition against their Russian alternatives.

By Assel Satubaldina, editing by Tatyana Kuzmina