Kazakhstan: Turbulent tenge is the new normal for Kazakhstan
October 29, 2015
The Kazakh tenge has lost 40% of its value against the U.S. dollar since the National Bank of Kazakhstan (NBK) decided on 20 August to abandon its official exchange rate corridor and instead allow the tenge to float freely. The trade corridor let the Kazakh currency float between 170 and 198 KZT per USD, but the tenge collapsed immediately after the decision and lost 30% of its value against the greenback.
Turbulent weeks came after 20 August’s sharp depreciation, with the tenge experiencing another major plunge. Due to uncertainty regarding whether the U.S. Federal Reserve would decide to hike interest rates during its 16-17 September meeting, the Kazakh currency touched a new record-low on the day of the meeting when it hit 284 KZT per USD. The drop triggered daily interventions from the Central Bank and a four-percentage-point increase in its new monetary policy rate to 16.0% on 2 October, which prompted the currency to stabilize somewhat. Latest data from the Central Bank show that the NBK’s forex interventions have totaled USD 1.6 billion since mid-September.
Although the Fed refrained from increasing interest rates at its 16-17 September meeting and despite the NBK’s intervention in the foreign exchange market, high uncertainty persists and strong volatility seems to be the new normal in Kazakh markets. The tenge has followed a gradual albeit uninterrupted downward trend since the end of September. On 30 September, the Kazakh currency closed the month at 272 KZT per USD and, by mid-October, it slipped to 276 KZT per USD. It continued falling at the end of October and, on 28 October, the Kazakh currency closed the trading day near the 280 KZT per USD mark. At this level, the tenge has lost over half of its value on an annual basis. The Consensus view of analysts surveyed this month by FocusEconomics is that the tenge will close 2015 at 268 KZT per USD. In 2016, analysts predicts that the tenge will close the year at 282 KZT per USD.
Analysts suggest that the weakening of the tenge is a double-edge sword for the economy. It has fueled inflation, hurt private consumption and ignited speculation in the foreign exchange market. However, consistent with a broader strategy of allowing greater currency flexibility, the tenge depreciation will shore up Kazakhstan’s deteriorating current account position. The current account is expected to swing from a 2.8% of GDP surplus in 2014 to a 3.2% of GDP deficit in 2015, according to analysts surveyed this month by FocusEconomics. If the result is in line with the forecast, this will represent the first current account deficit since 2009.
Author: Ricardo Aceves, Senior Economist