Who appreciates a depreciation?

How might the new exchange rate reshape our economy?

Yesterday, the central bank of Kazakhstan cut the value of the tenge by almost a fifth -- the largest such adjustment in four years.  How might it affect the nation’s economy?

The most evident consequence – and the National Bank lost no time in pointing it out – is that exports should increase.  Foreigners will get a fifth more than before of our products, in exchange for their dollar.  And so they will buy more of our oil and wheat, eventually.

Unfortunately, “eventually” is the operative word in that last sentence.  Exports won’t rise right away, because, like imports, they are usually fixed under contracts lasting one to three months.  In fact, the most immediate result of the devaluation may be a reduction of net exports -- that is, of exports minus imports. 

To see this, suppose that export contracts are in terms of tenge.  Then the new exchange rate will not affect exports.  The contracts have already fixed the number of oil barrels that can be sold, as well as their tenge price-tag, so the devaluation will affect neither quantity nor price right away. 

Now suppose that import contracts are in terms of dollars.  They fix the number of cars imported, as well as their dollar price; but their tenge price will rise by a fifth.  So imports (measured in tenge) will increase, and net exports will fall.  The last time that the central bank devalued the tenge substantially, in February 2009, imports exceeded exports for most of the remaining year.  Admittedly, the global economy was in recession then, so we couldn’t sell many exports. 

Since net exports are part of gross domestic product – which is the annual value of production on Kazakhstani soil – the most glaring consequence of the devaluation may be an economic slowdown.  Ironically, the National Bank cited as one reason for the devaluation a current surge in imports, reported Tengrinews.

Of course, eventually, the trade contracts will expire, and the new ones will take the new exchange rate into account.  Net exports will then rise.  But this probably won’t happen for several months.

Hey, big lender

Meanwhile, the devaluation will jeopardize the wealth of anyone holding tenge assets and dollar liabilities.  The most obvious example is the commercial banks.  They are not as far out on a limb as they were in 2009, but to some extent they still finance long-term loans (denominated in tenge) with short-term borrowing (denominated in dollars).  Marginal banks may go broke.

Consumers want to know whether they will have to pay higher prices because of the devaluation.  Again, the tenge price of imported goods and inputs will rise, quickly and sharply.  This is not the time to be purchasing a Mercedes.  But the prices of domestic goods may prove more resilient.  Yes, a local meat producer may raise his price to match that of the imports.  But he may instead hold it steady in order to increase market share.  In time, he will raise his price, because the devaluation increases the foreign demand for his meat.  But don’t look for that to occur before summer.

Especially vulnerable to the devaluation are local college students.  Their loans and scholarships are in tenge, but the prices of their textbooks are in dollars.  Moreover, universities like KIMEP hire many of their professors from abroad.  To keep hiring, the schools will have to raise their salary offers in terms of tenge, and they will pass on this increase to students by raising tuition.  In short, a devaluation is almost as much fun as a root-canal operation.  –Leon Taylor tayloralmaty@gmail.com

                  

Notes

1.  Thanks to Aisana Bekisheva, Raymond Cheung, and Aigul Izbanova for conversations.

References

Yaroslav Radlovsky.  Currency devaluation in Kazakhstan.  Tengrinews.  February 11, 2014.  Online.