Devaluation vs revaluation of Tenge: Kazakhstan keeps fingers crossed

Kazakhstan awaits 'a new decision' about the tenge exchange rate, fears a new devaluation and keeps its fingers crossed.

Devaluation fears in Kazakhstan have been high since the West started imposing sanctions on Russia for its involvement in the conflict in Ukraine and the pressure on the Russian currency exchange rate intensified.

Kazakhstan is closely linked with Russia, because of their huge common border and vast trade relations. Kazakhstan-Russia border is over 7.5 thousand kilometres long, and their economies stand so tightly together that Russia accounts for 36% of Kazakhstan’s imports and 7% of its exports. So everything that goes on in Russia sends a wave to Kazakhstan.

Besides, Kazakhstani residents remember too well the nearly 20% devaluation of February 2014. So every time there is a cause for uncertainty the devaluation fears resurface. 

Throughout the year Kazakhstani officials have repeatedly made statements explaining that Kazakhstan had enough fedex reserves to keep the Tenge exchange rate stable, and promising that no new devaluations were forthcoming. But in spite of their efforts, many remained unconvinced.

On several occasions panic-driven queues gathered at exchange bureaus throughout the country causing cash bottlenecks and fuelling the speculations even further. Kazakhstanis now tend to keep their savings in dollars or euro rather than in Kazakhstan's national currency, the tenge, because of lack of trust to the latter.

An especially large spike of distrust came in the beginning of July when the West unveiled its first sanctions against Russia.

On July 1 then-minister of Economy and Budget Planning of Kazakhstan Yerbolat Dossayev who was later appointed Minister of National Economy of Kazakhstan had a press-conference to refute devaluation speculations.

Minister Dossayev was asked by a journalist whether the Western sanctions against Russia and the Chinese-Russian agreement to depart from US dollar and start using Russian rouble and Chinese yuan in their mutual settlements made a new devaluation in Kazakhstan more likely than ever.

"I understand that we here feed on rumors, we live by them. There is a Kazakh word for it - “Uzyn kulak" [a phraseological expression literally translates from Kazakh as “long ear”] … I would like to say that today there are no preconditions for any kind of devaluation. Take a look at the Russian ruble exchange rate: despite all the circumstances it is stable enough and remains within the range predicted by the Russian [central] bank. There is a similar situation in Kazakhstan,” Dossayev said.

Answering the other part of the question on whether the Kazakh government was nourishing plans for a yet another devaluation, he clearly stated that a new devaluation of the tenge was “not expected”.

Dossayev said that there was nothing threatening in Kazakhstan’s larger neighbours agreement to move away from US Dollars and towards Roubles and Yuan in their payments. He said that this was “normal” and that Kazakhstan itself was planning to start trading with China in yuan.

This gave a new tweak to Kazakstan's currency policies and sent an important signal. 

Speaking to the journalists earlier this week the Governor of the National Bank of Kazakhstan sent another signal about the changes to come. He said that a new decision on the tenge exchange rate would be made this week.

Kazakhstan keeps its currency, the tenge, in a managed float - within a pegged corridor of 182 to 188 tenge per 1 US dollar. But the new decision is likely to expand the corridor. 

On the one hand the statement spells uncertainty for Kazakhstanis, who are now keeping their fingers crossed and waiting for the promised decision to come. But the Governor unveiled some details hinting that no dramatic changes were forthcoming, at least not right away.

He once again assured that the current tenge exchange rate was not experiencing excessive pressure from the Russian Ruble to US Dollar exchange rate fluctuations, that Kazakhstan's balance of payments was "generally fine" and that the country's fedex reserves were in good shape and had even grown in August. He even went as far as saying that "there is space for strengthening the Tenge". 

The planned expansion of the pegged corridor may reconstruct the exiting 185 tenge per dollar +/-3 tenge range to "185 tenge per dollar +3 tenge / - 15 tenge", he said. The new range clearly demonstrates that the Kazakh government has some revaluation expectations. 

If the range changes the way Governor Kelimbetov specified, it would mean a substantial change for Kazakhstan's currency management system, since the country has been keeping its managed rate in a narrow corridor for the last 5 years. After the 25% devaluation of the Tenge on February 4, 2009 the exchange rate was set to 150 tenge per dollar +/- 5 tenge. And after the most recent 19% devaluation of the Tenge on February 11, 2014 the rate was pegged to 185 tenge per dollar +/- 3 tenge.

The promised expansion of the corridor from 6 tenge to 18 tenge poses no immediate threat to the residents' pockets, however. It basically means three things, all of them good: it will make Kazakhstan more flexible in the face of the global currency market shocks; gradually make Kazakhstanis more accustomed to exchange rate fluctuations and, thus, more panic-resistant; and buy Kazakhstan some time.

Here are the three in greater detail.

The narrow corridor was a good way for Kazakhstan to create the feeling of stability among its population. Years ago, in the period from 1992 to 1995, Kazakhstan was experiencing a spinning hyperinflation that left a painful imprint on its population's mentality, that now largely defines the population's attitude to tenge exchange rate fluctuations. Keeping the exchange rate in a managed narrow corridor helped heal these wounds by reducing fluctuations, preventing market speculations and giving people a feeling of stability.   

However, it is hard for the Kazakh government to maintain the managed exchange rate, and the narrower the corridor the harder it is. The country's central bank has to use its fedex reserves to compensate the market fluctuations and absorb the shocks. So, creating a sense of stability for the population comes at a price.   

With the international situation becoming more heated and the external pressure on the currency escalating, Kazakhstan needs more space for manoeuvre. Expansion of the corridor is a way to create the space and reduce pressure of the country's fedex reserves, 'good shared' as they are, they are still not inexhaustible. This will make Kazakhstan more flexible towards changes in the global situation and at the same time, since it won't be a completely free float, the sense of stability will still remain. 

An added benefit is that the wider corridor will gradually get people accustomed to the exchange rate changes. As long as the corridor is pegged it creates a safe sandbox for the population's distrustful mentality. In time this will make Kazakhstanis more resistant to speculation-driven panic, and thus, will reduce the risks to the country's financial system, and subsequently create even more space for manoeuvre that the country might need should the global situation continue deteriorating.   

Since Russia is already working on reducing its dependance on US dollar - by dealing in rubles and yuan in its international trade - and Kazakhstan is heading the same way, according to Minister Dossayev, in time both Kazakhstan and its main trade partner Russia may become less receptive to the US Dollar-spearheaded currency exchange rate fluctuations. However, this does not happen in a snap of fingers. So Kazakhstan needs to bide some time and continue safeguarding its financial system from shocks while it is gradually redistributing the currency weights in its external trade. 

With the new developments in the making, Kazakhstan is waiting for the 'new decision' to be announced with bated breath and fingers crossed.

By Tatyana Kuzmina (Dinara Urazova contributed to the story)