Kazakh currency strengthens but foreign reserves continue fall

Kazakh currency strengthens but foreign reserves continue fall
The tenge appreciated by 10.8% between January 21 and March 15.
By Naubet Bisenov in Almaty March 17, 2016

Kazakhstan’s embattled national currency, the tenge, has recovered its bounce in recent weeks, after depreciating by 46% in 2015.

The tenge started appreciating on January 21, after touching a historical low of KZT384.48 against the dollar. This shift coincided with the announcement of a snap parliamentary election in Kazakhstan and with an upward trend in oil prices for the oil-producing country.

It continued strengthening against the dollar in February, appreciating by 4.4% and has appreciated by another 1.6% in March so far, said Daniyar Akishev, the governor of the National Bank, during a visit to the western oil town of Aktobe.

In total, the Kazakh currency appreciated by 10.8% between January 21 and March 15, when the price of oil started falling on global markets. On March 15 and 16, the tenge fell back by 1.4%.

Central bank officials have denied a link between the strengthening of the tenge and the upcoming parliamentary election on March 20, though voters may feel happier with the government with a stronger tenge in their pockets. 

Akishev said that the appreciation of the tenge was not linked to “domestic politics”. “It’s wrong to say that we are pursuing some policy around certain dates,” Akishev noted, maintaining that the exchange rate is set by foreign factors such as the global oil price and the economic situation in the country’s main trading partners. “I believe this [appreciation] is in no way linked to domestic political processes in the country,” he said.

Instead the bank has linked the appreciation to higher oil prices, which have hovered above $30 per barrel, supported by talk of Russia and major OPEC members reaching an agreement to freeze oil output at January levels.

Akishev has also pointed to tax payments for the second half of 2015 that fell due in February, which pushed up demand for tenge. Many Kazakhs keep their savings in dollars and have to transfer some of this into tenge to pay their tax bills. “At the end of February in a period of tax payments the National Bank was forced to buy foreign currency due to the high supply of foreign currency in the market,” he told senators.

The governor said the central bank had started observing a “significant fall in demand” for foreign currency from the population in January. “The net sales of dollars by all exchange offices in the country totalled $213.1mn [in January]. This is the lowest [monthly] figure in the past 10 years.”

Akishev – who readopted a free-floating exchange regime when he replaced Kairat Kelimbetov, a staunch supporter of the managed exchange rate – said that unlike previously the National Bank had intervened in the foreign exchange market in February only to buy “excess supply” of foreign currency. Akishev reiterated that the National Bank was continuing to stick to its policy of allowing a free-floating exchange rate.

“Net interventions of the National Bank in the form of foreign currency purchases stood at $474mn,” he noted. Without the central bank purchases of dollars the tenge would have strengthened further  “up to KZT310” against the dollar, according to some local analysts. The National Bank’s net sales of foreign currency totalled just $57.7mn in January.

Disappearing reserves

Regardless of foreign currency purchases, the central bank’s foreign exchange reserves fell by 7% in January and 0.3% in February to stand at $18.82bn at the beginning of March. The assets of the National Oil Fund increased by 0.22% in January but decreased by 0.16% in February, totalling $63.55bn.

The bank explained that a decrease in net foreign exchange assets was mostly linked to a reduction in foreign currency swaps with commercial banks by 26.9% in January and in the balances of commercial banks’ correspondent accounts at the National Bank.

The central bank’s decision to increase interest rates on tenge-denominated deposits from 10% to 14% and reduce interest rates on dollar-denominated deposits from 3% to 2% in February also helped stop the dollarisation of deposits: “According to preliminary figures, we see a small rise in deposits in the national currency by KZT300bn [€780mn],” Akishev boasted. “We expect growth in retail tenge deposits to be even higher in March 2016.”

The governor also announced that the central bank would pay an estimated KZT73.6bn to tenge deposit holders whose deposits were less than KZT1mn at the time of the adoption of a free floating exchange regime on August 20, to compensate them for the change in the exchange rate since. He estimated the total amount of such deposits stood at KZT69.5bn at the time.

On March 14, the National Bank left its policy rate unchanged at 17% as there are “no necessary conditions” for reducing the rate, Akishev explained. “Signs of stabilisation on the global oil market have an unsustainable nature, while the annual inflation rate remains high in Kazakhstan. Keeping the rate at the current level in an economic slowdown reflects the need to maintain demand for tenge assets.”

He said that the National Bank had solved problems with long-term tenge liquidity as it could see “structural excess” of tenge liquidity because of increased budget spending and a growth in foreign currency supply.

Akishev also said that a campaign to legalise shadow capital had picked up in November 2015 after the government extended for one year a legislative amendment that had suspended the requirement to keep legalised capital in banks for five years or pay a 10% levy. As a result, Kazakh citizens legalised more than KZT390bn (slightly over €1bn) between November 29 and March 5, increasing deposits. In total, the population have legalised KZT473.6bn since September 1, 2014, when the campaign was launched.

On March 1, Finance Minister Bakhyt Sultanov said that the pace of legalising undocumented property had also picked up after the adoption of the amendments: the value of shadow property legalised increased by KZT425bn to KZT787bn in the three months to March 1.

The government expected the campaign to legalise up to $12bn in undocumented property and shadow capital. According to State Statistics Committee estimates, the grey economy was equivalent to 27.3% of the official economy in 2014. Kazakhstan’s GDP stood at $223.5bn in 2014.

In the first campaign to legalise shadow capital and undocumented property in 2001 around 3,000 Kazakh citizens legalised a total of $480m in 20 days and a total of $5.3bn ($3bn in money and $2.3bn in property) was legalised in the second campaign in 2006-2007.