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National Bank of Kazakhstan conducts foreign exchange interventions to stabilize tenge - comments

22 september 2015, 17:47

National Bank of Kazakhstan decided to conduct foreign exchange interventions in order to stabilize the situation on the domestic currency market.

 1) Why has the National Bank taken this measure to intervene? Do you think it may not have been necessary to do it?

It obviously felt that the tenge’s devaluation was proceeding too rapidly – and not only against the US dollar. For example, versus the Russian Ruble the tenge fell more than 20% at one point – too much instability against a currency with which Kazakhstan has an important trade relationship. It’s not necessarily unwise for a central bank to “check” the decline of a currency with intervention, as this can discourage speculation that the tenge’s devaluation is a one-way street, but the trick is in balancing this checking while conserving enough currency reserves for the longer run. So far, Kazakhstan’s reserve situation looks relatively stable, so there is some further firepower to combat disorderly moves.

 2) How effective is this measure? Is it necessary to intervene in general?

Time will tell how effective such intervention is, the important thing is to give the market a sense that things are moving in the right direction for the country’s economy again, which will be difficult due to the reliance of Kazakhstan’s economy on raw material imports.

 3) What do you think the “bottom” of the tenge is? If the National Bank had not made this intervention yesterday, to which level could the tenge fall? ... 350, 400 or 500 tenge per dollar?

When there is a very high interest rate differential, there is no real bottom potential for the actual exchange rate (explained a bit below) as tenge deposits earn far higher interest, meaning that the general pressure is on the exchange rate to drift higher over time in a rough relationship with the interest rate difference – with capital inflows and outflows either strengthening or weakening the currency on top of this.

 4) Under what conditions can there be a real strengthening of the tenge?

The only real chance for significant tenge strength would be a sharp rise in oil prices, which, judging from the current supply and demand situation, would only likely arrive from some unanticipated geopolitical disruption, as the current picture suggests supply excess and fairly low prices for quite some time as the low oil price slowly sees a constriction of supply from lack of new investment and slowing of, for example, US shale production.

 5) What is your forecast now for the tenge rate until the end of the year?

I don’t maintain any formal forecast for the tenge, but the currency could stabilize relatively soon near current levels now that the biggest part of the shock is likely over with, though a risk going forward could be further weakness in oil prices. Still, our baseline forecast is that oil prices are set to remain relatively low, but slightly higher over the next twelve months than they are at present. It’s important to mention that “stability” in the tenge’s case means that the currency continues to depreciate, but not much relative to the high interest rate which tenge deposits receive. So, with US rates close to 0 and Kazhstan rates at 12%, a 12% change over the next year could see the actual KZT exchange rate move 12% lower, but there is no difference due to the “carry” or interest rate differential between the two currencies.

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