Why 185?

Why did the National Bank of Kazakhstan devalue in such a large leap?

As soon as the central bank weakened the tenge by a fifth last week, commercial banks complained that they had not been privy to the secret, reported the business weekly Panorama. 

Some secret.  The tenge had been losing value against the dollar for three years.  When the exchange rate hit 153 a year ago, predictions abounded that it would soon go to 155, the maximum rate that the National Bank had said it would defend.  At that point, it would either have had to announce a new maximum rate to protect (i.e., to devalue) or make clear that it would draw upon new sources of dollars – like the national welfare fund – in order to hold the line at 155.  (To keep the tenge from weakening, the National Bank can sell dollars and buy tenge in currency markets, if it has the dollars.)  Tapping the Samruk-Kazyna fund would have whipped up a political storm.  The only reasonable course was to devalue.  The commercial banks should have seen that – everyone else did – and should have shifted their wealth into dollars accordingly.  The National Bank is not their guardian angel.           

The only surprise was that the Bank adopted 185 rather than 160 or 165 as the new maximum.  Had it revealed this in advance to the commercial banks, they would have promptly sold tenge and bought dollars until the rate on the street was 185.  The only difference between this scenario and the actual one is that the banks, and only the banks, would have profited by arbitrage.  We’d all love to have a guardian angel.

Still…why did the National Bank go to 185?

There goes the neighborhood

The usual explanation is that the Bank was just keeping up with the Joneses.  Ever since last summer, the central bank in the United States, the Federal Reserve, has publicly mused that it would eventually tighten monetary policy.  This would raise interest rates in the U. S. and might attract rich investors in the Third World who want to park their money somewhere profitable.  To buy dollars, they would sell the local currency.  The exchange rate for that currency, against the dollar, would rise.  Central banks in developing countries might as well prepare for the inevitable by devaluing now.  This way, they may be able to manage events rather than react to them.  They may gain credibility and avoid a free-fall in the currency.          

If this is the story, then it would seem more sensible to devalue in small steps rather than in one fell swoop.  We’re not sure just how a tightening of the dollar would affect international flows of wealth.  Yes, local currencies will weaken, but how much?  What makes 185 the magic number?  The very fact that observers treat the new target as a surpryz is a source of disquiet.

The good news in this tinderbox is that the market exchange rate homed in on 185 within two days of the Bank’s announcement.  The Bank has credibility, probably because its previous governor, Grigorii Marchenko, held the exchange rate close to the old target (150) for two years while restraining inflation to roughly 6% (not bad, by CIS standards).  We’ll see whether the new governor, Kairat Kelimbetov, can stick to his guns.  -- Leon Taylor, tayloralmaty@gmail.com 

References

Panorama.  Natsbank ‘udyvlen’ pretenzyyamy bankov.  February 14, 2014.