Kazakhs have grown accustomed to their national currency crashing abruptly to the detriment of the general population. The Central Asian country has experienced no less than six such “devaluations” or devalvatsiyas — a word that has come to signify the rapid and sudden weakening of the tenge rather than a general term for loss of value over time — since gaining independence in 1991.
It comes as no surprise then that even after the loosening of currency controls in August 2015, unofficially labelled the “sixth devaluation” by the Central Asian country’s media, some Kazakh citizens have grown paranoid about the possibility of another tenge collapse. This has created a vicious circle, with Kazakhs periodically rushing to exchange tenge for foreign currency, which in turn weakens the local currency.
Despite the current tenge free-float, Kazakhs have developed an adversarial view towards such devaluations, as tenge crashes during the previous stricter currency regime were generally enacted without warning. Typically these resulted in temporary chaos in the retail sector, with shoppers flocking to supermarkets and white goods stores to buy up bargains before retailers shut their doors to raise prices of imported goods. Meanwhile, citizens felt they had been tricked by the authorities as the value of their savings slumped overnight in dollar terms.
The currency has lost over 40% of its value since the last devaluation, but has stabilised since then. Kazakhs, however, are still wary of keeping their savings in the national currency.
This attitude towards the currency rate has prompted Kazakhs to attempt to outsmart or out-gamble the authorities, who are seen as malevolent. Such public trust issues dictate that, if the authorities are calling for de-dollarisation, they are trying to trick citizens by getting them to shift most of their savings into tenge then massively depreciating the currency against the greenback when least expected.
The National Bank of Kazakhstan (NBK) has gradually cut its policy interest rate by a cumulative 1.75 percentage points throughout 2017 to the current level of 10.25%, but deposit rates for individuals at banks mostly stayed at around 13%-14% throughout most of the year. The high deposit rates were meant to keep tenge savings attractive for Kazakhs and encourage de-dollarisation.
While the measures did briefly get some to go along for the ride, the majority were sceptical and took a more cautious position. As the share of dollar deposits declined, a sudden switch took place in August, when the share of foreign exchange (FX) deposits went up 2 percentage points to 45%, as tenge deposits fell 3.4% m/m. The switch may have been influenced by the expectations of a new devaluation sparked by media rumours.
Russian news outlets in March alleged that Kazakh currency speculators en masse had been taking advantage of high rates on tenge deposits by taking out loans in roubles and dollars — often from neighbouring countries — exchanging them into tenge and depositing them at high rates, hoping to profit off the difference. That, in turn, led to excess tenge in circulation, which would require a gradual devaluation of the tenge, the reports posited. But the currency stayed generally stable throughout the spring and summer with very few publicly announced interventions from the central bank. The reports suggested that the authorities were postponing the devaluation until after the end of the Expo 2017 fair in Astana.
Since the central bank is allowed to avoid reporting interventions in its monthly reports when relying on money drawn from the country’s national oil fund, the stability of the tenge was largely ensured by such “invisible” interventions. According to some Kazakh traders, the central bank has been selling the national currency against the dollar and the ruble during every oil price rally throughout the year. If correct, that would ensure oil price hikes did not make foreign currency cheaper, which could attract the attention of some Kazakh currency traders and speculators, and hurt the government's de-dollarisation measures. It would also prevent tenge instability for the convenience of tourists visiting the ex-Soviet country for the Expo 2017 event in July-September, during which time world oil prices were on an upward trajectory.
As it turned out, the authorities did not hold any immediate plans to let the tenge take a dive after Expo. Instead, as the closing date of September 10 approached and Kazakhs began buying foreign currency, the central bank started intervening to stabilise the tenge, as a panic-induced crash would have hurt its de-dollarisation goals.
“The amount of FX deposits increased 1.3% MoM in August. In particular, there was a 2.2% MoM pick-up in retail deposits, whilst corporate FX deposits were nearly flat last month,” Russian investment bank VTB said in October, adding that “the fundamentals (i.e. crude oil, RUB) were supportive, while the deposit interest rate differential is still widely in favour of tenge savings.”
The stabilisation efforts may have worked; after a 6.35% cumulative spike in FX deposits in August and September, the brief trend reversed in October with a 2.1% m/m fall. Yet it is not clear if the direction has settled — US dollar trading on the Kazakh market increased by 18.2% to $7.698bn in October, significantly above the August and September levels of $6.295bn and $6.511bn respectively.
The tenge registered at KZT335.7 to the dollar on December 21, stronger than the lowest rate reached this year so far of KZT345.6. The country’s opposition media are still warning of an inevitable crash lurking around the corner for tenge currency holders. Opposition-run 365.kz news agency opined the NBT will eventually be forced to stop intervening in the market and allow the tenge to drop as low as KZT350 to the dollar, if not further — the lowest level reached by tenge last year was KZT380. This is expected to take place within the first few months of 2018.
The basic argument is that the central bank cannot continue to draw on its FX reserves indefinitely and if the population doesn’t stop anticipating depreciations, the central bank will eventually hit a brick wall. The bank’s FX reserves have been gradually declining since August, according to central bank figures, recording a 3.34% decrease since July. The change is still minuscule compared to the 9.78% m/m boost in reserves it received in July, likely thanks to buying foreign currency during oil price rallies.
As noted previously, the central bank can also draw from the National Fund and rising oil prices this year have been beneficial for the fund — Brent Crude stood at $64 per barrel (bl) as of December 21. Given that Brent Crude prices are expected to average $57/bl in 2018, up from an average of $54/bl in 2017, based on the latest Short-Term Energy Outlook from the US Energy Information Administration, the fund may provide sufficient backing to tenge stability.
“I would not advise our people to buy up foreign currencies for future use, especially when the [future] rate is not [looking] favourable,” central bank chairman Daniyar Akishev said in September, adding that the population might “lose” as the tenge is likely headed for recovery thanks to “the macroeconomic situation”.
However, futures contracts provide a more volatile picture of the future, expecting prices at anywhere between $48/bl and $68/bl.
Moreover, the fund’s ability to keep supporting the NBK is also limited. On December 21 it was revealed that the Bank of New York Mellon has frozen $22.6bn in assets owned by the National Fund as part of a legal battle between the government in Astana and Moldovan businessman Anatolie Stati, leaving the fund unable to access 40% of its holdings.
That combined with the possibility of Brent Crude dropping as low as $48/bl does not bode well for the strength of the tenge, given the eroded popular trust in the national currency.
Another force weighing down on the tenge is the Russian ruble; the central bank blamed the weakness of the tenge on US sanctions-driven ruble depreciation in August. Aivar Baikenov, the director of the asset management department of Kazkommerts Securities, believes that at present the tenge has a stronger correlation with the ruble than with oil prices. This correlation, nevertheless, is only relevant in the context of Western sanctions on Russia and other political issues.