152

Why does the tenge weaken?

Since February 2009, the National Bank of Kazakhstan has held the daily exchange rate close to or below 150 tenge per United States dollar, with little difficulty – until now.  In the past two weeks, for the first time since early 2000, the currency has weakened to 152 tenge per dollar.   

In principle, the National Bank should be able to strengthen the tenge by exchanging dollars for it.  But recent shrinkage of the Bank’s reserves of foreign currency suggests that it may have some trouble defending its target rate.  Net international reserves fell by 8.06%, the largest monthly decline since June 2012, according to Bank data.  By comparison, these reserves fell 8.1% in January 2009, just before the Bank devalued the tenge by 25%.  They were $18.2 billion at that time and $25.6 billion last month (roughly $19 billion,  adjusting for inflation in Kazakhstan).   Moreover, gold reserves this June declined by 13.75%, the largest monthly fall since January 1994, in the wild woolly days of Kazakhstan’s transition to markets.  The main reason is probably the steep fall of 12% in late June in gold prices, which are now recovering.  Even so, the overall pattern of growing weakness in the tenge and in reserves is troubling.  What gives?

An eventual depreciation was probably inevitable, due to expectations of rising prices (i.e., inflation).  The unemployment rate in Kazakhstan has been falling steadily ever since 2000, indicating that the economy is using up its excess capacity.  When it reaches full capacity, deploying all of the workers and machines that it comfortably can, then additional demand for its products will drive up prices rather than output.  This would make its exports more expensive for foreigners to buy – and imports cheaper for Kazakhstanis to buy.  Since the country relies on net exports (the value of what it sells to foreigners, minus what it buys from them) for economic growth, the National Bank would surely have let the exchange rate rise above 150 someday, in order to make exports cheaper.  (If a buck can buy 165 tenge, rather than just 150, then the dollar price of Kazakhstani exports will fall by a tenth.)  And, in fact, the tenge has been depreciating fairly steadily since early 2011, when it was just above 145, according to Bank data.  The foreign exchange market in the Kazakhstan Stock Exchange has not been unusually active, but the average exchange rate for the tenge has been rising steadily since 2011 at least.  Which brings us back to the $64 question: Why is the tenge depreciating to above 152, a record level, now?  At the moment, the rate of inflation in Kazakhstan is falling.  The annual inflation rate in consumer prices is 5.9%, the lowest since November.

The depreciation is particularly mysterious because it may put the Bank on dangerous ground.  If the Bank cannot hold the exchange rate below 152, which is something of a bright line, then it may have to announce a new target – say, 153 or 155.  If speculators anticipate this, then they will sell tenge now while they’re still worth something.  This would raise the exchange rate on the street (i.e., the tenge would weaken), forcing the Bank to act sooner than it would like.  In short, the Bank may face a speculative attack.  To avoid volatility, it should make its intentions clear.

Who yearns for the yen?

Some reasons for the tenge’s depreciation are obvious enough.  The world oil market has been anemic this year, and the quantity of crude sold may surpass that of 2012 by less than 4%, reports a business weekly, Panorama.  (The ischemia may be temporary: Futures prices for crude have been rising since April.)  Also, all things are relative: The tenge may be depreciating in terms of the dollar because the latter is strengthening.  The Federal Reserve has now made clear that it may weaken its stimulus of the U.S. economy someday, although it is in no hurry to pull back.  This hint is enough to convince speculators that growth in the supply of dollars may slow down. The dollar would become scarcer, so its expected value, in terms of foreign currencies, would rise.  With respect to the euro and the yen, the buck is strengthening at the moment -- albeit in the latter case partly because the Bank of Japan is doubling its money supply in a campaign to escape deflation.

Another factor in the tenge depreciation, if only a remote one, may be that pension reform has compromised Astana’s financial credibility.  The sudden decision this spring to “unify” private pension funds into one controlled by the government suggests that it had earlier underestimated the cost to it of future pensions.  In addition, some analysts contend that the pension nationalization will impede embryonic financial markets in Kazakhstan, reported Panorama.  In that case, the tenge will lose value relative to currencies used in financial markets that flourish. 

In brief, tenge may be weakening for the same reason that I can’t sell my used toothbrushes: No one wants them, particularly in such abundance.   –Leon Taylor, tayloralmaty@gmail.com

References     

NASDAQ.  Gold prices; crude oil futures prices.  www.nasdaq.com

National Bank of Kazakhstan.  Statistics.  www.nationalbank.kz 

Panorama.  Aktyva Natsbanka v zolote sokratylys’ za mesyats na 13.6%.  July 12, 2013.