Naubet Bisenov in Almaty -

Kazakh President Nursultan Nazarbayev’s re-election for another five-year term in an early poll on April 26 - and the consequent hastily-held inauguration just three days later - have not so far been followed by any signs of an impending devaluation of the national currency. Why?

Devaluation of the tenge had been widely expected for months after the price of oil and the currencies of the country’s main trading partners – Russia and EU countries – hit historical lows against the dollar. Following the inauguration Nazarbayev has reiterated the government’s pledge not to allow “sharp” fluctuations in the exchange rate of the tenge despite predictions of an up to 30% drop in the tenge’s value by the end of June made by Kazakhstan watchers, including Morgan Stanley and Bank of America Merrill Lynch.

At a news conference on April 27 Nazarbayev ruled out a sharp devaluation of the tenge. “There won’t be anything sharp after the election,” he said, because “there are no prerequisites” for devaluation. “We are working [on the adoption] of a floating exchange rate of the tenge.”

Kazakh analysts explain the president’s optimism by the fact that the delay in devaluation -rumoured since the previous 19% devaluation in February 2014 and expected since the oil price and the ruble lost around 50% last autumn - have forced the Kazakh economy to adapt to the new conditions. Authorities, aware of the negative connotations ordinary Kazakhs attach to the word “devaluation”, have meanwhile started talking about a “switch to a floating exchange rate” in an attempt to soothe fears of a devaluation, as if absolving themselves from any consequences resulting from this “switch”.

Olzhas Khudaybergenov, a former adviser to Kairat Kelimbetov, the chairman of the National Bank of Kazakhstan, agrees with the president that “there are no requisites” for a devaluation of the tenge now because both the oil price and the ruble have stopped exerting pressure on the Kazakh national currency. “At the current levels of the ruble and oil, there is no pressure on the tenge now,” Khudaybergenov tells bne IntelliNews. However, the need for devaluation will arise again “if the price of oil falls below $50 per barrel and stays there for two or three months”.

Devaluation fears had resulted in a decrease in the share of tenge-denominated bank deposits at the end of 2014 and beginning of 2015, hitting a low of 44% in total deposits and 32.08% in retail deposits. A slight growth in February and March to 46.6% and 32.7% respectively shows that a run on the tenge has stabilised and corporate and retail deposit holders are prepared for a possible devaluation. The growth could also be explained by government measures to boost the attractiveness of tenge-denominated deposits and discourage further dollarisation: authorities have increased the upper limit of secured tenge retail deposits from KZT5mn (€25,000) to KZT10mn (€50,000) and raised annual interest rates from 8% to 10%, reducing the maximum rates to 3% on dollar-denominated deposits (some banks have now started paying a 0% on euro deposits).

However, a relatively strong tenge has severely hit local production in Kazakhstan as ordinary citizens have seized an opportunity to seek cheap bargains across the border in Russia. The hardest hit is the domestic car-assembling industry and official dealerships. AziaAvto, a major player, reported a 47% year-on-year decrease in production to 4,381 cars in the first quarter of 2015, while according to Association of Kazakh Auto Business figures, official dealerships managed to sell only 7,774 new cars in January, a 28.53% decrease year on year and a 40.42% fall on December 2014, of which only 936 cars were domestically assembled – a 62.2% slump year on year.

The government admits the problems domestic producers are facing because of an inflow of cheap products from Russia. In order to help Kazakh car producers overcome problems associated with a strong tenge in February the Kazakh government announced that it would allocate KZT20bn (€100mn) to encourage the domestic car-assembling industry by subsidising interests rates on loans issued for the purchase of Kazakh-made cars. The loans at an annual interest of 4-6% will be issued to buy cars, the price of which doesn't exceed KZT5.6mn (€28,000).

Another industry that is suffering from a weak ruble is the food sector, especially those enterprises which are based in the country’s north. “These are not only food enterprises but also our agricultural producers,” Deputy Investment and Development Minister Albert Rau told a news conference in Astana on May 6. At the same time, according to the minister, Kazakh food producers have managed to adapt to the current situation, perhaps because they have greater flexibility to adjust to market conditions, thanks to a short production cycle.

As one of the measures to protect local food producers from cheap Russian products the government has imposed restrictions on imports of certain foodstuffs, citing technical regulations.

Relaxed stance

Anticipating a relatively prolonged period of low oil prices and negative effects of Western sanctions on the Russian economy over Moscow’s annexation of Crimea, in November Astana redrafted its budget for 2014-2016 based on an average oil price of $50 per barrel. The government also said at the time that it was prepared to revise its spending further should the price of oil dip to $30/b.

This is one of the reasons there is no urgent need to devalue the tenge sharply at the moment, believes Anuar Ushbayev, an analyst and managing partner at the Almaty-based Tengri Partners investment firm. The Kazakh budget does not directly depend on revenue from the oil and gas sector as all proceeds from the extractive sectors are accumulated in the National Oil Fund and are released to the budget in form of annual guaranteed transfers. According to law, the government can tap into the National Fund to the tune of KZT1.7tn (€8.5bn) a year in 2015-2017. In November President Nazarbayev pledged up to $3bn annually on top of the guaranteed transfer to fund development projects in the country.

 “I don’t think there is any threat to government finances because of the low oil price,” Ushbayev tells bne IntelliNews. “Given the size of the National Fund, the budget is capable of surviving years of the low price of oil without jeopardising government spending.” According to the Finance Ministry, the assets of the National Fund stood at KZT16tn (€80bn) as of May 1. Generally, the government can dip into the National Fund for additional money as long as the fund's assets do not fall below 30% of GDP. The country's GDP stood at KZT38tn (€190bn).

Despite the government’s apparent relaxed stance on the tenge’s value against the ruble and the euro – Russia and EU countries accounted for 15.8% and 44.4% of Kazakhstan’s total foreign trade in 2014, including 33.3% and 20.9% of total imports – international banks are continuing to predict a significant slump in the tenge’s value in the near future.

There are several reasons why the government didn’t devalue the tenge when the oil price and the ruble were showing high volatility in autumn and winter 2014. First, the government did not want to squander the little trust the national currency enjoyed after the February 2014 devaluation, with Kelimbetov repeatedly saying that there would not be another devaluation “this year”.

Secondly, devaluation plans, if they ever existed, were spoilt by the announcement of an early presidential election on April 26, which in turn was sparked by the fear that the economic troubles the Kazakh economy is experiencing would have complicated the scheduled re-election of Nazarbayev next year, whom the state-run media paints as the only guarantor of prosperity and stability.

And the third possible reason for a further delay in what the government calls a “switch” to a floating exchange rate is a series of national holidays that fall between May and July – Kazakhstan marked Day of People’s Unity on May 1, Day of Defenders on May 7 and will mark the 70th anniversary of VE Day on May 9 and Astana Day on July 6, which coincides with Nazarbayev’s 75th birthday. Astana would not want to spoil any of these holidays by social protests which may accompany any significant drop in the tenge’s value. The social unrest in the oil town of Zhanaozen in December 2011 that led to clashes between protesters and security forces, claiming at least 15 lives, coincided with the celebrations of the 20th anniversary of Kazakhstan’s independence.

An Almaty-based banker says he is sceptical about the authorities’ reassurances about the strength of the tenge and that the National Bank would sooner or later have to allow the national currency to slide against the dollar. “Authorities are afraid of a panic among the population and protests, given how easy it is now to mobilise protest mood on the social media,” the banker says. “Perhaps the National Bank will not dare to conduct a one-off devaluation but will instead ease the exchange gradually despite the costs of doing so.”

Expectations of devaluation among the local population have caused huge selling of tenge for dollars, with the National Bank defending the national currency at a cost of giving up half of its $28bn of net foreign reserves, including $5bn of gold, Standard Bank said in trip notes on May 6 following a visit to Almaty and Astana. Even though there is no concern, as the National Bank could at any moment use the assets of the National Fund to boost foreign reserves, “there has been a liquidity squeeze, with banking sector lending coming to a halt, and businesses finding it extremely hard to borrow funds”, it said. “Tenge borrowing costs are above 15%, and banking sector NPLs are rising.”

With confidence in the tenge not returning, the central bank would struggle to inject any liquidity – if the National Bank were to bring tenge rates lower, locals would continue selling them for dollars, Standard Bank believes. “With 70% of retail deposits said to be in US dollars by now, confidence in the tenge is at near rock bottom, and only a devaluation would restore calm and liquidity in the market,” concludes Standard Bank, which expects a 10-15% devaluation in August, after Astana Day. “There is an added argument that with so many deposits in US dollars, the pain from a devaluation would be more palatable than in the past. It would certainly come as no surprise.”