Devaluation of Tenge21 august 2015, 19:17
1) What is the reason for the devaluation of the tenge? Why did the government do this?
The reason the tenge peg was broken is the same reason for any other peg breaking – the reality of the situation simply no longer supported the tenge maintaining its valuation amid collapsing export revenues from weak oil prices, as oil is the lion’s share of Kazakhstan’s exports. When a country like Kazakhstan is significantly dependent on a given basket of exports for its hard currency revenues, it is more useful to think of the country’s currency being de facto pegged to that basket of commodities than to anything else. So Kazakhstan’s officialdom/central bank could choose – try to keep the tenge strong and risk draining central bank reserves or float/devalue it.
2) Since the events of this week, what is your forecast now for the tenge rate until the end of the year?
I don’t maintain a forecast for the tenge, but it will likely trade somewhat weaker, though we may have seen the worst of the devaluation if oil prices stabilize from here.
3) Will these measures by the national bank help the country's economy?
They are painful measures in the short term, particularly for consumers who hold savings in tenge and will see prices for imported goods rising. Also any Kazakhstan individual or corporation with debt denominated in one currency and revenues or income in tenge will be worse off. But these factors aside, this devaluation can actually soften the blow from lower oil prices and make any Kazakh producer or exporter more competitive in the global market and stabilize government finances. In the much longer run, it is difficult for small EM economies to maintain currency stability without some kind of peg arrangement, however. So one can imagine an eventual repegging to the USD or another currency, or even a basket, sometime in the years ahead.
4) Do you agree with these steps? What would you recommend to the government of Kazakhstan?
Kazakhstan likely did not have much of a choice in the matter, again due to the risks from the collapse in export revenue in USD, and therefore tenge, terms from keeping the tenge pegged in any way to the US dollar, especially in light of other major currency weakness in Russia since last year and China’s recent move as well. I wouldn’t pretend to offer advice to Kazakhstan’s officials, but a long term diversification away from excess reliance on commodity exports should be a key priority.
5) Many experts believe that Kazakhstan's membership in the Eurasian Economic Union does not contribute to the economic development of the country. Russia is under sanctions, the economy is in the deep crisis, the ruble was devalued heavily. Do you think that Kazakhstan should exit from this union?
That’s a difficult question for outside observers to answer and owing to Kazakhstan’s particular set of circumstances, both geographically and historically. Certainly, Russia’s recent economic and geopolitical headwinds are doing little to boost Kazakhstan’s fortunes, though it’s heavy reliance on imports from Russia meant, until this latest tenge devaluation, at least, that at least import prices were kept quite low, and this revaluation merely offsets some of the previous ruble weakness.