EM currency contagion hits Kazakhstan, tenge tumbles

Kazakh tenge slumps by over 18 per cent in morning trade

By Claire Nutall of bne in Astana

Kazakhstan became the latest emerging market to succumb to competitive devaluation pressures as the Tenge plummeted against the US dollar on Tuesday, following Astana’s decision to allow a 19 per cent depreciation to shore up the country’s export competitiveness.

“The need to restore the external competitiveness of the tenge exchange rate, the balance of trade of the economy, and maintain the competitiveness of domestic producers has necessitated changes to the national bank’s monetary policy,” the central bank said in a statement.

Despite the currency’s plunge, Kairat Kelimbetov, central bank governor, said the situation in local currency markets remained stable and under constant monitoring by the bank.

The official rate of the Kazakh Tenge fell to 184.45 to the US dollar by 11 am in London on Tuesday, from 155.56 on Monday (see chart), after the central bank announced that it would allow the national currency to devalue to around 185 per dollar, a 19 per cent devaluation.

This scraps the previous range of KZT145 to KZT155 to the US dollar that the National Bank of the Republic of Kazakhstan has been sworn to maintain. The bank cited the recent depreciation of the Russian rouble and US monetary tapering as reasons for its decision to abandon its currency band.

Kazakhstan’s balance of payments is another factor because although the current account remains positive, the country has seen an increase in imports in recent months, particularly in consumer goods.

Kazakhstan’s economy grew by 5 per cent in 2013, according to the International Monetary Fund, and growth of 5.2 per cent is expected in 2014. However, Kazakhstan has already seen a gradual deterioration in the exchange rate since mid 2013, and expectations of a devaluation have grown, leading to further pressure on the tenge.

This from analysts at Visor Capital:

Before today’s move, the KZT depreciated by 2.2% during 2013, adding another 1% since the beginning of 2014… We generally expect positive impact on economic growth in Kazakhstan, as the KZT devaluation would support exporters and ease pressure on the National Bank which used US$4.5bn last year supporting the currency. Going forward, we would expect the rate of inflation may accelerate.

Kazakhstan last devalued the tenge at the depths of the financial crisis in February 2009, by 18 per cent. It was followed by an immediate spike in consumer price inflation.

As happened then, many retailers on Tuesday closed their doors to reprice their goods in spite of official assurances that prices would be monitored and comments by Serik Akhmetov, prime minister, that the devaluation must not be allowed to provoke price rises.