The trouble with tenge

Does Kazakhstan have enough cash?  The head of Kazakhstan’s central bank thinks so.  Last week, Kairat Kelimbetov told journalists that plenty of tenge were circulating.  If he gave reasons for this view, the newspapers didn’t elaborate on them.

His claim is puzzling.  As a rule of thumb, in normal times, the supply of tenge should rise in proportion to output.  Too many tenge would raise prices, deceiving people about the true value of the products; too few tenge would hinder transactions at the cash register.  Over the past two years, output in Kazakhstan has grown by roughly 9%.  But the amount of cash (measured as the money supply M0) fell by 1.6%, according to data from the National Bank.  Possibly, in purchases, cash is giving way to debit cards, which draw on checking accounts.  But demand deposits aren’t rising rapidly, either.  M1, the measure of tenge supply that includes checking accounts as well as cash, is up by only 1.1%.  What gives?

Cash crash

In theory, one explanation could be falling prices.  The number of bread loaves and phone calls may be rising, but the amount spent on them may increase more slowly if their prices decline sharply.  But in reality, the average rate of increase in Kazakhstani prices – inflation – hasn’t fallen in the last two years and may even be bumping up a bit.  Prices can’t explain Kelimbetov’s claim that the country has sufficient cash.

The only remaining possibility is that people are spending each tenge more rapidly than before.  If a trillion tenge are in circulation, and if each tenge is spent twice per year, then total spending is 2 trillion tenge per year.  If the rate of turnover rises from 2 to 3, then spending will increase to 3 trillion tenge, although the physical supply of tenge remains at one trillion.

To some extent, a higher rate of turnover – economists call it “velocity” – means a more efficient use of cash.  But to make the numbers work, the turnover rate would have to have risen by nearly a fourth since late 2012.  Such a radical change might create difficulties for small businesses, which rely on cash transactions.  The needed tenge spend less time in their cash registers and more time in transit.  The firms' transactions – paying change to customers or a day’s wages to temporary workers – become more convoluted.  So, why, exactly, should we believe that Kazakhstan has enough nalychni den’ge? –Leon Taylor tayloralmaty@gmail.com

Notes

To estimate the required increase in velocity, I use the identity that the number of tenge (M), times the average rate of turnover (V), equals spending on nominal gross domestic product (output Q times the average price level P): MV = PQ.  Solving for V and taking logs gives us this equation: Log V = log P + log Q – log M.  Taking differentials gives us this result:  The relative change in velocity about equals the sum of the two relative changes in prices and output, minus the relative change in money.  For example, the differential d[log V] = (1/V) dV = dV/V, which is a relative change.  Differentiating the right-hand side variables as well, we get dV/V = dP/P + dQ/Q - dM/M.  

Over the past two years, the price level has risen by roughly 14%; output, 9%; and M1, 1%.  Plugging these data into the formula gives us that velocity, which is a rate, has increased by roughly 22%, or nearly a fourth.

References  

Alevtina Donskyx.  Economika viuchennik urokov.  Delovoy Kazakhstan.  October 24, 2014.

National Bank of Kazakhstan.  Various data series.  www.nationalbank.kz

Oksana Kononenko.  Kairat Kelimbetov:  ‘Fevralskaya devalvatsya tenge provedena s bol’shym zapasom.’  Panorama.  October 24, 2014.  

Quote of the week

“Be very, very careful what you put into that head, because you will never, ever get it out.”

—    Cardinal Thomas Wolsey on King Henry VIII

“As long as deflation is a possibility, the [Federal Reserve, the US central bank] would be well advised to explain, again and again, why inflation that is too low is also bad for the economy. The lesson that high inflation is a threat is well known to politicians and voters. There is a need, as Cardinal Wolsey might have said, to get something else into their heads.”  

-- Floyd Norris, “Inflation? Deflation Is New Risk,” New York Times, October 30

An illiquid diet

Does Kazakhstan's central bank view commercial banks with rose-tinted glasses?

The head of Kazakhstan’s central bank points with pleasure to today’s low ratio of foreign debt to the size of the economy, much lower than in the run-up to the financial crisis of 2008.  Kairat Kelimbetov estimates the ratio of Eurobonds to gross domestic product as 2.5%.  He regards this as a symptom of economic stability, reports a business weekly, Delovoy Kazakhstan.

Foreign money is not the only issue confronting monetary policy makers, and possibly not even the main one.  Another is “liquidity” – the ease with which we can spend money.  The ratio of illiquid money to liquid (specifically, the M3 money supply to the M1) is higher now than it has been since 2000 at least – even higher than in 2008, according to data from the National Bank of Kazakhstan.

Illiquidity concerns us because many commercial banks, knee-deep in mortgages and bonds, finance these long-term loans with short-term money.  As long as long-term borrowers faithfully pay interest until their loans come due, the temporal mismatch doesn't pose a problem.  But if they stop paying interest, then the commercial bank’s antsy creditors may withdraw their money in the short term, be they foreigners or natives.  This would leave the bank hard up for cash and may compel it to call in loans, a recipe for recession.

As it happens, the share of all bank loans that are delinquent has hung high in Kazakhstan since 2009.  If this share rises, and if oil prices continue to fall, then creditors to commercial banks may panic.  The rising illiquidity of money suggests that the consequences of the withdrawals may not be trivial.

Biking in reverse

The amount of delinquent loans (that is, non-performing loans, or NPL) has fallen by a seventh throughout 2014, Kelimbetov said. Setting aside BTA and Alliance banks -- as well as Kazkommertsbank, which acquired BTA’s bad loans from the government this year, allegedly for market share -- the NPL ratio should be 15% by January, he noted.  This is a little like saying: “With the possible exception of thieves, no one ever steals in Kazakhstan.”  This summer, the National Bank said the January target for the entire bank sector was 15%, reported Financial Times.  It took the Bank only four months to back-peddle. 

For the sector, the NPL ratio will fall to 10%, which is barely acceptable, by the beginning of 2016, predicted Kelimbetov.  The National Bank has been expressing similar hopes for more than five years. The truth is that the commercial banks are still trouble. 

However, a large M3-to-M1 ratio need not signal trouble.  It may even be a blessing.  Long-term investments in roads, water treatment and education may stimulate the long-term rate of economic growth more than would short-term loans financing household spending on televisions and vacations.   Bank defaults are only one possible consequence of illiquidity – but one worth bearing in mind.  –Leon Taylor tayloralmaty@gmail.com

References

Alevtina Donskyx.  Economika viuchennik urokov.  Delovoy Kazakhstan.  October 24, 2014.

Jack Farchy.  Leading Kazakh bank eyes foreign expansion.  Financial Times.  July 6, 2014.

National Bank of Kazakhstan.  Various data series.  www.nationalbank.kz .

Oksana Kononenko.  Kairat Kelimbetov:  ‘Fevralskaya devalvatsya tenge provedena s bol’shym zapasom.’  Panorama.  October 24, 2014.  

 

     

Heavy money

Why is broad money growing like weeds in Kazakhstan?

Since 2011, a broad measure of money supply, M3, has been rising more rapidly than narrower – that is, more liquid – measures in Kazakhstan.  In the past two years, M3 has been more than triple the size of M1, the narrow measure comprised mainly of cash and checking accounts.  The figure for August 2014 was 3.54.  The last time that August M3 was so large was in 2008 (3.26), just before the real estate bubble burst.  Isn’t that a coincidence?

Of course, a high ratio of M3 to M1 does not mean that catastrophe is inevitable – only that it’s possible.  The ratio indicates that illiquid forms of money – that is, forms that are hard to spend quickly – are becoming prevalent.  This may occur because of major projects, which require large and long-term loans.  If these projects introduce Kazakhstan to new and more efficient modes of production, then they may spur economic growth.

But there is another possibility:  Creditors have loaned generously to construction projects, such as those for residential centers and shopping malls, that are risky because they would pay off only in the long run, if ever.  If these projects fail to pay interest in the interim, then lenders of dollars to the banks – dollars that industries require for buying foreign inputs – may pull out their money in the short run, leaving banks and borrowers up the creek.  Falling oil prices may precipitate this dollar flight.

In response, the government blames economic instability on volatile oil prices.  The ostensible solution is to shift investment away from oil and gas and toward industries that prosper when the former don’t.  This will reduce instability at the price of a modest reduction in economic growth, one hopes.

The argument presumes that the subsidized new industries will make money; there is no point in substituting unprofitable industries for a profitable one.   But if they are haymakers, then why didn’t private investors back them in the first place?  Were they ill-informed?  Then the government should inform them, not displace them.  The sneaking suspicion is that the industries are rewarded more for their political connections than for their efficiency.  Exhibit A is tourism in this remote and landlocked country.   --Leon Taylor tayloralmaty@gmail.com

Notes

Data on M1 and M3 are from the National Bank of Kazakhstan (nationalbank.kz).  To control for seasonal factors, I used the August figures for every year beginning with 2000.

 

Sanction and inflation

Do they go together like a horse and carriage?

Prices bumped up a bit in Kazakhstan last month, reports the government’s statistical agency.  Compared to September 2013, prices rose 7.4%.  This was significantly higher than the 6.4% average for January through September of this year relative to the same period of last year.  Although a one-month change in the inflation rate is too short to tell us much about the economy, it's intriguing to see that since last September, the prices of nonfood goods have risen 8.4%, which is outside the National Bank’s target corridor for inflation of 6% to 8%.

Why the bump?  Ever since the West levied sanctions against Russia because of Ukraine’s civil war, Russian food exports to Kazakhstan have increased, according to Panorama.  Thus Russia may export inflation to Kazakhstan as well.  But the inflation rate in Russia is close to that of Kazakhstan, so the sanctions may not affect Kazakhstani inflation considerably, reports the business weekly.  It is not clear whether this is Panorama’s own analysis or that of the National Bank of Kazakhstan.  In any case, it’s a leaky bucket.       

If anything, the sanctions should lower the price of Russian exports to here.  Since Russia can no longer sell as much as before to Western Europe and the United States, it will try to sell more to Kazakhstan.  That will require price cuts.  And food prices, for once, do not comprise the fastest-rising category of Kazakhstan’s inflation. 

A more logical cause of this price blip is that Western countries want to buy more than before from Kazakhstan, since they no longer can buy from Russia.  This will raise Kazakhstan’s export prices -- and consequently its domestic prices, since producers will shift output from the home market to the foreign one.  Kazakhstani consumers will compete for now-scarce goods by bidding up prices.  That, at least, is the theory.  In reality, Kazakhstan’s leading export, crude oil, is restrained by the recent fall in global prices to below $100 per barrel.  Consequently, this back-channel seems unlikely to fuel much inflation here.       

Money is no object?

Let’s round up the usual suspects.  The February devaluation must lead eventually to higher prices expressed in tenge, because the currency has lost a fifth of its purchasing power over foreign products.  A delay of several months in the inflationary consequences of a devaluation is not unusual, since the trade contracts must be rewritten to take into account the weakened tenge. 

And there’s the variable that Panorama, the statistical agency, and (above all) the National Bank rarely want to discuss – money supply.  Here the picture is mixed.  Over the last two years, the narrowest types of money – pure currency (M0), and currency plus transferable tenge accounts in banks (M1) – have been stable.  The total rates of change since August 2012 are -1.6% and 1.1% respectively. 

Broad money is something else.  M2, which encompasses M1 as well as transferable foreign-currency accounts, has risen 13.8%.  M3, an even broader measure of money, is up 29.3%.  In contrast, gross domestic product over the past two years has risen only about 9% in terms of output.  To the extent that people and firms spend broad money on goods and services, the potential stimulus to inflation is clear. 

But recognizing this possibility would require the National Bank, which is supposed to manage the money supply, to admit that it may be the villain in the inflationary story.  --Leon Taylor tayloralmaty@gmail.com

References

Panorama.  Uroven’ centyabriskoy ynflatsii mozhet stat’ kluchevim dlya peresmotra prognozov (September inflation may be key to forecasts).  October 3, 2014.

National Bank of Kazakhstan.  www.nationalbank.kz. The source of monetary data used here.

 

Statistical Agency of Kazakhstan.  www.stat.gov.kz.  The source of GDP data used here.                     

Is the population boom a bust?

Checking in with Malthus

Now exceeding 7 billion, the world population has been rising by nearly a billion souls per decade.  True, the growth rate has nearly halved since 1960, to 1.2% per year.  But the poorest populations have been growing at almost double the world rate.  They account for almost a fourth of the addition to world population although they comprise only an eighth of the total population.  Five African countries are growing by 3% or more per year, including Zimbabwe (3.1%).  The Palestinian West Bank and Gaza Strip also grow by 3%.  No wonder demographers suspect that population growth creates poverty, although the most rapidly-growing nation, the small Gulf state Oman (9.2%), is rich, according to World Bank data.

In Soviet days, Soviet scholars fearfully anticipated rampant growth throughout the Central Asian satellites.  That hasn’t transpired.  Three countries grow at the world rate or slightly lower: Kazakhstan, Kyrgyzstan and Turkmenistan.  The largest populace in the area, Uzbekistan, is growing faster (1.5%).  But the pacesetter for the region is its poorest nation, Tajikistan (2.2%), in line with demographers’ expectations.

A simple model, assuming a constant rate of growth, predicts more than 90% of the fluctuation in population for most nations over a period of 10 or 15 years; after that, the growth rate tends to change.  This suggests that a simple theory may explain the size of population – and Thomas Malthus provided one, in 1798.  One of the first professional economists, Malthus argued that population growth doomed humanity since the populace would expand more rapidly than food supply.  The amount of food per person would fall until we starved.  Famine, pestilence and war would thin the population, raising the amount of food available to each survivor until people had recovered enough to beget children again.  Then food supply per capita would fall back to the subsistence level. 

Charitable cruelty

We cannot escape this cycle of catastrophe because – according to Parson Malthus -- we cannot control our passions.  Consequently, the rate of population growth will be determined largely by the fertility rate (the number of children born to an average woman), which changes slowly.  (From 1965 to 2008, the fertility rate in Kazakhstan fell just 27%, from 3.49 to 2.56 – but fell as low as 1.8, in 1998 and 2000.)  So it’s no surprise to find that most populations grew at a constant rate over the medium run.  Food supply, on the other hand, depends on a finite amount of land, so it grows linearly – that is, at a diminishing rate.  The populace grows faster than the harvest.

Malthus’ dark vision extended to altruism.  He opposed welfare for the poor since it would merely encourage them to have more hungry children.  “Such charity was only cruelty in disguise,” explained Robert Heilbroner, the late historian of economic thought.

China adopted a Malthusian policy in 1979, when it forecast a spike in fertility in the 1990s.  Parents with just one child received priority in health, housing and education.  Those with more than two children were taxed 5% of their income per child; the rate increased with each additional child.  The policy may seem a success:  Since 2000, China’s population has grown by less than .6 of a percent per year, half of the world average, and the fertility rate fell by two thirds in less than 30 years.  But China’s sizzling economic growth may have played a role, too.  Richer households have fewer children, perhaps partly because they would have to give up high wages in order to devote time to the bambinos.  In any event, the policy incurred social costs.  In 1986, one child was aborted for every two births. 

Calling Dr. Pangloss

Though compelling, Malthus’ theory does not fit the facts.  Since 1798, both the world population and world income per capita have grown sharply.  Latter-day Malthusians, such as the Club of Rome, warn that catastrophe is just around the corner; witness global warming.  Nevertheless, the past two centuries have given us a pretty good dataset.

Anti-Malthusian economists explain that an increase in population density stimulates innovation, since more people can exchange more ideas.  Whatever the reason, some nations would welcome a population boom.  Russia lost five million souls from 2000 through 2009, when its population dipped below 142 million, though it has grown slowly since then, to 143 million in 2012.  An indicator of the future labor force, the share of the population younger than 15, fell from 1990 through 2004 in China, Japan, Kazakhstan -- and sharply in Russia, from about 22% to 15%.  Maybe two heads are better than one, especially if one head is young. --Leon Taylor tayloralmaty@gmail.com

Notes

1.  The growth rates of national populations reported here are annual averages for the period from 2000 through 2012, using World Bank data.  I estimated them with this OLS model:  Ln Pop(t) = a + r*Year, where ln denotes a natural log and r is the exponential rate of growth.  R-squared for most estimations exceeded .92 and usually exceeded .99.
2.  Concerning the fertility rate in Kazakhstan: A measure of volatility, the ratio of the standard deviation to the mean, was .21 – lower than one might have expected, given the dramatic changes due to migration over the 1990s, and given that there were only 25 observations for the 44-year period.  

Good reading

Karen Hardee, Zhenming Xie, and Baochang Gu.  Family planning and women’s lives in rural China.  International Family Planning Perspectives 30(2): 68-86.  2004.  A source of the material used here about China.

Karen Hardee-Cleaveland and Judith Banister.  Fertility policy and implementation in China, 1986-88.  Population and Development Review 14(2): 245-286.  June 1988.  Another source of the Chinese material.

Robert Heilbroner. The worldly philosophers.  Touchstone.  Seventh revised edition.  1999.  Depicts Malthus vividly.

Thomas Malthus.  An essay on population.  1798.  Online.  Brilliant and provocative.

Joseph Schumpeter, Capitalism, socialism and democracy.  Harper.  Third edition.  1950.  Argues that returns to producing ideas do not diminish as ideas increase, because they don’t require finite resources – just imagination.

References

United States Bureau of the Census.  International data base.  2013.  The source of estimates of world population used here.

World Bank.  World Development Indicators.  2014.  Online.  The source of estimates used here for population levels, fertility rates, and the share of youths in national populations.