Here we go again

For the second time in three years, the tenge is tanking.  Its exchange rate has been rising since late March, when it was 319 tenge per dollar.  Now it’s just under 376, up nearly 18% from five months ago.

What’s the problem? It can’t be oil prices.  The spot price of Brent crude, which is a benchmark, has risen steadily since January 2016, when a barrel cost $30. Last July the price was $74, according to the United States Energy Information Administration.  Rising oil prices can signal an increase in oil demand, which would raise the demand for tenge – and strengthen its exchange rate.  Yes, there is a bit of ambiguity concerning the exchange rate of tenge for a dollar: global oil prices are expressed in dollars, so these should strengthen, too.  But this ambiguity does not affect the euro value of the tenge, which is also falling – nearly 12% since late May.  In short, oil prices don’t account for the tenge slide.   

 

What else? As usual, the pundits blame Russia.  Sanctions against Russia over the Ukrainian war have cut its income and thus its demand for imports from Kazakhstan.  So we will sell the exports instead to the Americans by cutting the dollar price of a tenge.  At least, that’s the story.

But the sanctions have been in play since 2014 and bear no obvious relationship to the tenge exchange rate over the last four years. The dominant event for the tenge over that period was the National Bank’s decision to float it in August 2015, when it stood at 188. By late January, it had soared to 382. It then strengthened until last spring.

In addition, a comprehensive sanction should lead to a onetime drop in the income of the targeted nation – and thus to onetime side effects. The exchange rate will rise by a certain amount – say, by 10 tenge to the dollar – but after that, the rate should level off.  For example, the exchange rate may rise from 320 tenge per dollar to 330 – and then hold at 330. The rise should not continue unless the sanctions are strengthened.  And even that change should cause just another onetime drop in income.  In short, a particular sanction should not lead to a continued devaluation of the tenge.  To explain why the tenge has continued to weaken since March, we must identify a continuing cause.

The most obvious candidate is the interest rate.  The central bank of the United States, the Federal Reserve, indicates that it may raise interest rates four times more by the end of next year.  Meanwhile, in Kazakhstan, the National Bank has signaled its intention to hold the base interest rate down to 9%. (Adjusted for inflation, that’s just 3%.) So investors can expect the interest rate here, relative to the US rate, to keep falling this year.  That expectation undermines the demand for assets that pay off in tenge – and consequently reduces demand for the tenge, since you need it to buy those assets.  This leads to depreciation. The tenge will keep weakening until it fully reflects the change in expectations.

Turkish taffy

There’s more. Turkey’s odd insistence on holding down interest rates despite double-digit inflation has destabilized not only the lira but also the currencies of other developing nations, because uncertainty is spreading.Uncertainty may eviscerate the demand for these currencies on two counts.  

First, it is not clear when the effect will end, so it may have a continuing impact on exchange rates.  For example, by some estimates, the Central Bank of Turkey may have to raise interest rates by six percentage points to stabilize the lira. It may do so in several steps, to avoid one big shock to the economy.  Since it is not clear how long the central bank will remain behind the curve, the collapse of the lira – its dollar value has already fallen by a third in the past year -- may keep dragging down the tenge.

Second, uncertainty can magnify the instability of the exchange rate, causing investors to avoid currencies with a history of dizzying fluctuations. As for the tenge, well, investors remember 2015.

Finally, there’s the factor that the National Bank never likes to talk about – continued expansion of the tenge supply.  M2 – the supply of cash, checking accounts and small savings accounts – is up 9% since December, more than triple the rate of output growth.  We may have more tenge than we need to buy new products. This will lead to depreciation, since people around the world will hold the new tenge only if their price drops; that price, in terms of foreign purchasing power, is the exchange rate. Since it is not clear when the National Bank will stabilize the supply of tenge, investors will keep expecting the exchange rate to rise and so will keep selling tenge for dollars.  The tenge will continue to stumble. 

The National Bank is not wholly oblivious to this problem.  Its press release last week said that thanks to the continued weakening of the tenge, and to the slowdown in the decline of inflation, “it is possible that the monetary conditions might get tightened before the end of this year in order to minimize the risks associated with growing negative expectations.” The National Bank has never been celebrated for its mastery of English, but its point is clear: It might, just might, raise the base interest rate when its board meets again, in mid-October.  More uncertainty. Stay tuned.  --Leon Taylor tayloralmaty@gmail.com

References

Constantine Courcoulas.  Turkey's lira needs more than intent to raise interest rates.  Bloomberg News. September 4, 2018.  bloomberg.com

National Bank of Kazakhstan.  Press release no. 27: The base rate unchanged at 9%.  September 3, 2018.  nationalbank.kz

United States Energy Information Administration.  Statistics.  eia.gov