News Column

Kazakhstan devalues national currency.

February 12, 2014



The National Bank of Kazakhstan (NBK) has decided to stop supporting national currency KZT. At the same time, the bank sets the new exchange rate of KZT against USD at KZT 185 per USD 1 plus/minus KZT 3 with some measures to level fluctuations in the short-term. In longer-term, the exchange rate should be defined by macroeconomic factors, according to the statement. This was confirmed at a hastily-called press conference by head of NBK Kairat Kelimbetov who stated that the NBK 'will protect KZT from sharp moves away from the new level of KZT 185 per USD 1.'

 

Prior to the devaluation, exchange rate was KZT 155.5 per USD 1. The decision was announced after the NBK several times declared that there is no need for devaluation of national currency. Until now, the bank kept its policy to keep KZT in corridor of 145-155 per USD 1. The NBK also declared a plan to shift towards inflation targeting.

 

Despite announcement of NBK, many of Kazakh banks are selling USD for over KZT 200. Some of the markets in the country closed its doors to change prices. There were also reports about an increase in prices for cars, some online shops suspended its operations in order to adapt to new prices.

 

At the same time, the government urged to take measures to stop a sharp rise of prices, especially for first-need products (similar actions were taken individually by regional governors).  The government also declared that there is no need in indexation of pensions as they were already raised by 9% since Jan 1, taking into account inflation prognosis for this year. The authorities are also trying to depict the move as positive for domestic producers as their products will become more competitive against imported goods.

 

Most of analysts were surprised by the size of the move, which was far larger than the RUB 5% decline this year. The move is seen as a desire to put a floor under the currency of Kazakhstan which economy relies on exports of energy and commodities. The decision of Kazakh authorities came after Ukraine imposed control over capital flows and devaluation of Argentinian currency.

The NBK reasoned that decision was prompted by following factors:



   • Volatility on international markets caused by U.S. federal Reserve gradual withdrawal of its quantitative easing policy. The U.S. policy leads to a gradual retreat of currencies from emerging markets, among which is Kazakhstan.

   • The uncertainty of the exchange rate of Russian RUB as Russia is the main source of imports for the country.  RUB weakened by 7.1% in 2013 with a the downward trend persisting in January.

   • Worsening balance of payments of the country (although it remained positive in 2013 according to preliminary data) due to rising imports, mainly of consumers goods.

The bank also wanted to cut potential for speculative and inflation expectations. The rumors about possible devaluation of KZT started in July last year. As a result, a high activity on exchange market was observed – the volume of transaction in exchange bureaus was much higher in H2 than in H1 and the volume of deposits in foreign currency expanded by 40% through 2013 while deposits in national currency remained roughly at the same level.

 

The decision will inevitably lead to higher inflationary pressure than expected. The NBK targets inflation in 6-8% this year but many analysts consider it extremely difficult to achieve. Last year Kazakhstan posted a record low inflation of 4.8%. On the other hand, devaluation of KZT will have a positive impact on profitability of Kazakh commodity exporters (state-owned KazMunayGas and privately-owned Kazakhmys and ENRC) and generally on budget revenues as two-thirds of Kazakh exports is generated by oil and its derivatives.

 

The other issue which is rather neglected by the government are social costs of the decision. The decision will add fuel to demands for wage increase and may increase risks of social protests in the country. Devaluation also undermines the society's trust into the financial system of the country and generally towards political system. There will be also additional pressure on borrowers who took credits in foreign currency which may result in further deterioration of Kazakh banks' loan portfolio.


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Source: IntelliNews - Weekly Reports


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