The champagne currency

Will the National Bank of Kazakhstan soon devalue the tenge?

Suppose that you are to meet another Almaty resident somewhere in the city.  You don’t know whom you will meet, or anything about him or her; nor do you know when or where.  Then where will you go, and when?  How will you identify yourself?

A favorite answer in this parlor game is that you will meet at midnight December 31 at Republic Square, perhaps at the pavilion of statues.  Probably you will carry a sign saying, “Are you looking for me?”   The point is that you will choose the most obvious time, place and identification, since your unknown partner will do the same.

Currency speculators look for focal points, too.  The word on the street is that the word on the street is that the central bank will soon devalue the tenge. To maximize profits from short sales, you must anticipate when others will close out their positions.  The most obvious focal point is:  Right after the New Year’s break, at a new exchange rate of 200 tenge to the dollar.  What recommends this point is not that it’s logical but that it’s easy to imagine.  (A second possibility is February, since the Bank devalued in that month on both prior occasions.)

If this reasoning is right – and I’m not sure that it is – then we should see a frenzy in the forex market for tenge in the next few days.  Keep your eye on KASE.  Of course, the short sales might compel the National Bank of Kazakhstan to devalue, whether it wants to or not, since the shorters will profit by purchasing dollars for tenge and draining the Bank’s dollar reserves.

Why does “everyone” expect devaluation?  Because she “knows” that the Bank intercedes when oil prices, the ruble, and forex reserves all fall.  Indeed, the ruble had weakened before the devaluations of 2009 and 2014; and oil prices and dollar reserves also fell in the run up to the February 2009 reduction of 25% in the target dollar value of the tenge.  This year, since June, the dollar value of the ruble has halved, and the peak-to-trough decline in the daily futures price of some oils has been something like 40%.  Ergo, devalue.

Shooting craps

If we could be sure that oil and the ruble would not recover until 2016, then devaluing the tenge might well make sense.  Historically, Russia has been Kazakhstan’s leading partner in trade; a weaker ruble would eventually reduce Russian demand for Kazakhstani exports and sharpen Russian competition with Kazakhstan in global markets.  Lower oil prices in the spot market reduce Kazakhstan’s export revenues for a while – say, for less than a year – because oil demand is not sensitive to the price in the short run.  That is, the lower price does not induce sales of many more barrels – not right away, at least; so Kazakhstan sells about as many barrels as before, but for less money per barrel.

The operative word in that paragraph is “if.”  The value of the ruble is contingent on the Western sanctions imposed on Russia for intervening in Ukraine.  They are painful for Europe’s largest economy, Germany, and it is hard to believe that Berlin will comply with them until 2016.  More important, a 40% decline in daily oil futures of 40% does not imply a concurrent 40% decline in annual spot prices, which are far more fundamental to production decisions than the speculative, volatile futures are.  At the moment, annual spot prices for Brent crude, the global benchmark, are down by about 12%, according to data from the United States Energy Information Administration.  If this rate of decline continues for another year, then -- judging from its performance since 2000 -- annual Kazakhstani GDP per capita may fall by 6% or less.  However, estimates of the excess supply in the global oil market have been running at one or two million barrels per day, or roughly 1% to 2% of global supply.  It is not evident that this can sustain a 12% reduction in price over all of 2015.

Bandwagon finance

In short, the Bank is in a gray area.  The ruble, and oil prices, may not continue to decline for long enough to enable a tenge devaluation to pay for itself.  Add to this the pernicious consequences of any devaluation for tenge holders, particularly the commercial banks.  When the Bank weakened the tenge this February, social-media rumors led to runs on three financial institutions in Kazakhstan.  Finally, devaluation would be inconsistent with financial reforms that the Bank is considering in tandem with the government, such as increased insurance for tenge deposits, a reduced rate of interest paid on dollar deposits, a rise in tenge liquidity for the banks, and a general move away from dollars and towards tenge (“dedollarization”). 

Were it not for the public pressure, the National Bank would not need to rush into a decision.  Its international reserves are, to say the least, ample.  Last month it held $7.1 billion of gold – slightly lower than in August, when it built its stash to $7.5 billion, but still a 29% gain since January, according to Bank data.  As of November, net reserves had been rising steadily since June to $27.9 billion, a 15% increase over January.  As if this wasn’t enough, the National Oil Fund, consisting mainly of royalties from exports, was nearly triple the Bank’s net forex reserves -- $76.8 billion in November, an 8% increase since January (despite the fall in oil prices).  Combined, the reserves and Fund could pay for merchandise and service imports for more than two years.  (Early this year, imports averaged $4.2 billion per month.)      

At this point, given these conditions and especially the uncertainty surrounding them, a second devaluation within a year is not logical.  However, we are moving beyond logic.  The word on the side of the bandwagon is “devalue,” and the bandwagon is filling up fast.  See you in Republic Square. –Leon Taylor tayloralmaty@gmail.com

Notes

Net reserves fell from $21 billion in October 2008 to $18.2 billion in January 2009, a 13% decline, according to Bank data.  They did not weaken so graphically in the run up to the devaluation last February.  They had fallen throughout most of 2013 but had been strengthening fairly steadily since November.  However, compared to January 2013, net reserves in January 2014 were down by about 9%.  In sum, the Bank sometimes devalues even when net reserves in prior months have been rising.       

References

     

Nikolai Drozd.  Svyazannii s dedollaryzatsyiy resheniya myagche syshectvovabshyx radykalnix ozhydanii.  Panorama.  December 26, 2014.