bne IntelliNews -

Kazakhstan’s national currency, the tenge, showed signs of stabilisation after the government abolished its trading corridor, allowing it to float freely on August 20.

Having spent $28bn on propping up the tenge for 18 months after a 19% devaluation in February 2014, the government reasoned that its new monetary and credit policy based on inflation targeting would create necessary conditions to revive economic growth and boost credit and investment activity, creating new jobs and bringing the annual rate of inflation down to 3-4% in the medium term.

Following the free float announcement the value of the tenge plummeted to KZT255.26 to the dollar in morning trade on the Kazakhstan Stock Exchange (Kase) on August 20 but made some gains, closing at KZT252.26 to the dollar. The Kazakh currency continued to recover the next day, starting the day with KZT252.47 to the dollar and trading around the 239.5 mark during the day.

Kazakhstan’s business community, which has been calling for government action to ease competition against cheap Russian imports thanks to a weak ruble, has hailed the latest devaluation and rushed to show support to the move in the face of possible public protests which traditionally accompany one-off devaluations in Kazakhstan. Being aware of the public sentiment towards any drop in the value of the national currency which inevitably results in price rises, the government said it would not allow sharp hikes in prices of food and essentials.

Meyram Pshembayev, chairman of the Union of Kazakhstan’s Machine Builders, called the announcement of free float as a “necessary and timely measure”, while Andrey Lavrentyev, chairman of the Association of Kazakh Auto Business, said the floating exchange regime was a “long awaited and great victory”. The country’s machine builders, especially car assemblers, were perhaps the greatest victim of the strong tenge as Kazakh buyers are reported to have spent billions of dollars on tens of thousands of cars in Russia.

The devaluation will also benefit Kazakh oil and metals producers as low global prices of minerals and sluggish demand have forced them to cut investment and downsize production, threatening to make thousands of people redundant. ArcelorMittal Temirtau, a Kazakh steel plant owned by Lakshmi Mittal’s ArcelorMittal, announced that it would postpone a 25% pay cut for its personnel from September. The steel makers has been embroiled in a row with authorities and trade unions over the move to which it resorted to avoid redundancies and Astana’s ire.

While the long-expected devaluation - which authorities resisted in order to maintain the little trust the tenge enjoys among the local business community and population - is seen as a positive move in Kazakhstan, the announcement has sent shockwaves through the currency markets in neighbouring Kyrgyzstan and Uzbekistan. Currency dealers in Kyrgyzstan raised the sell rate of the dollar to KGS70 on the tenge news against the usual KGS64-64 to the dollar.

The situation stabilised on August 21 as bureaux des changes in Bishkek brought back the sell rate close to the 65 mark. In neighbouring Uzbekistan, where dollars can only be bought freely on the illegal black market, currency dealers sold the dollar for UZS4,680 on August 20 against UZS4,500 the day before.