Jacopo Dettoni in Almaty -
Pressure on Central Asian currencies has eased after most of them touched historic lows in the first months of 2015, but renewed trouble could loom ahead as the Russian economy and the ruble remain on shaky ground.
The Kyrgyz som and the Mongolian tugrik have both recovered over the last few weeks on the back of two of Central Asia’s most iconic, and controversial, mining developments, Kumtor and Oyu Tolgoi. The som trades around KGS60 to the dollar, 6% higher than the historic low of KGS63.9 to the dollar it touched at the beginning of April, according to figures from the National Bank of the Kyrgyz Republic.
“The [Kyrgyz] economy is performing relatively well despite the economic slowdown in Russia and the region,” the IMF noted following a mission to Bishkek at the end of May. Annualised economic growth stood at 7% between January and April, up from 5% in the same period of 2014. Most of the credit for this goes to the country’s flagship mine Kumtor, which made up 7.4% of GDP in 2014. Kumtor is shoring up economic growth and the som, as production increased by 60% y/y in the first quarter of the year – excluding Kumtor, annualised economic growth was only 3.7%, down from 4.2% in the same period of 2014.
The Tugrik also made the most of the improved outlook for the development of giant copper and gold mine Oyu Togloi. The government and miner Rio Tinto struck a long-awaited agreement over Oyu Tolgoi’s underground expansion in May, paving the way for around $6bn of foreign direct investment (FDI) and “bolstering investor confidence in Mongolia” as a whole, noted credit rating agency Moody’s.
The two-year long impasse over Oyu Tolgoi’s expansion had depressed the local investment climate and depleted the country’s foreign reserves, which fell to $1.3bn in April from a peak of $4.1bn at the of 2012. The tugrik paid a high price for it, falling to MNT1,993 to the dollar at the end of March from MNT1,190 to the dollar in 2011, when a first initial stage of Oyu Tolgoi was under development. The fresh agreement breathed new life into the Mongolian currency, which now trades at MNT1,872 to the dollar, 6% higher than the March lows.
In Kazakhstan, politics played a big role in damping down speculation over the tenge. Kazakhtan’s President Nurlsultan Nazarbayev ruled out a devaluation of the Kazakh currency as soon as he secured a new five-year term in early elections in April. The political elite is committed to avoiding the same blow to its image that it suffered in February 2014, when it lost credibility overnight by devaluating the tenge by 19% against the dollar after it had repeatedly ruled out any such measure.
Pressure is now gradually easing. The ask price of a six-month tenge forward contract – which banks commonly use to hedge the forex risk in their portfolio – is now quoted at around KZT204 to the dollar, down from 240 back in February, according to Bloomberg figures.
Amid falling oil prices and a collapsing ruble, the National Bank burnt as much as $14bn, or two thirds of its total reserves, to defend the peg in the second half of 2014, the World Bank highlighted. However, the generous reserves accumulated in the National Oil fund are sufficient to keep the tenge stable for several years “even if there’s strong pressure”, Bloomberg quoted Juha Kahkonen, deputy director of the IMF’s Middle East and Central Asia department, as saying in an interview.
In the banks, the dollarisation of the deposit base remains high but stable, after deposits in foreign currency grew to 55% from 39% in 2014 alone.
The Central Bank of Uzbekistan and the National Bank of Tajikistan have also been busy trying to shore up their respective currencies. Authorities in Uzbekistan have reportedly limited the legal convertibility of the sum, which had fallen to UZS5,000 to the dollar in the black market in May, before recovering to the current level of UZS4,500. Their Tajik counterparts shut down dozens of private currency exchange shops, feeding a growing local black market, but also putting an end to the free-fall of the somoni, which now seems to have stabilised at TJS6.2 to the dollar, up from TJS4.7 at the end of 2013.
Easing pressure on Central Asian currencies mirrored the recovery in the ruble between January and May, when it returned below RUB50 to the dollar from RUB69 at the end of January. Yet the tide on the ruble has turned again as a political solution to the crisis in Ukraine seems further away than ever, casting new shadows over Central Asian currencies.
The course of the ruble directly affects Central Asian currencies mostly through the channel of remittances. Remittances from migrants working in Russia make up around 50% of GDP in Tajikistan and 33% in Kyrgyzstan. Uzbekistan also receives more than $6bn of remittances from Russia every year.
As the ruble falls, the monetary value of the money that workers send back home decreases, and total remittances to Central Asia are falling at an “alarming” rate of between 20% and 30%, the European Bank for Reconstruction and Development (EBRD) said in its latest regional outlook published in May. Should the ruble weaken further, it could once again drag down local currencies in Tajikistan, Kyrgyzstan and Uzbekistan.
A weaker ruble would also affect the competitiveness of Kazakh products against Russian products in the domestic market, adding new pressure for a devaluation, although with the government committed to keeping the peg, the faith of the Kazakh tenge lies more with oil prices. If the barrel slips below $50, a devaluation becomes inevitable, authorities have already pointed out.
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