Kazakhstan's central bank to allow 19% currency devaluation

By bne IntelliNews February 11, 2014

Clare Nuttall in Astana -

Kazakhstan's central bank announced February 11 that it will allow the national currency, the tenge, to depreciate to around KZT185 to the dollar, a fall of around 19%. The bank cited several factors including the reduction in quantitative easing in the US and the fall of the Russian ruble for its decision.

The National Bank of the Republic of Kazakhstan said that it would no longer maintain the tenge in its previous range of KZT145 to KZT155 to the dollar. It will now allow the tenge to trade at around KZT185 to the dollar, with a range of plus or minus KZT3.

Reasons for the decision include the reduction in quantitative easing in the US, which has led to an outflow of funds from developing economies, the bank said in a statement. The bank also cited uncertainty about the exchange rate of the Russian ruble, which has continued to weaken against the dollar since the start of 2013. Kazakhstan's balance of payments is another factor, as although the current account remains positive, the country has seen an increase in imports in particular consumer goods.

"The need to restore the external competitiveness of the tenge exchange rate, the balance of trade of the economy, and maintain the competitiveness of domestic producers has necessitated changes to the national bank's monetary policy," the statement said.

Kazakhstan's economy grew by 5% in 2013, according to the International Monetary Fund, and growth of 5.2% is expected in 2014. However, Kazakhstan has already seen a gradual deterioration in the exchange rate since mid-2013, and expectations of a devaluation have grown, leading to further pressure on the tenge.

"Before today's move, the KZT depreciated by 2.2% during 2013, adding another 1% since the beginning of 2014," wrote Visor Capital analysts in a February 11 note. "We generally expect positive impact on economic growth in Kazakhstan, as the KZT devaluation would support exporters and ease pressure on the National Bank which used ca US$4.5bn last year supporting the currency. Going forward, we would expect the rate of inflation may accelerate."

It is just over five years since the last devaluation of the tenge at the depths of the financial crisis in February 2009. Kazakhstan's previous central bank governor, Grigory Marchenko, announced an 18% devaluation on February 4, 2009 shortly after he was appointed to head the bank. At the time, Kazakhstan's banking sector was in crisis, and the bank chose to devalue to maintain the country's foreign currency reserves and support local producers.

The central bank governor, Kairat Kelimbetov, told a press conference in Almaty on February 11 that the situation in the local currency market remains stable and remains under constant monitoring by the central bank. He added that the devaluation would "contribute to economic efficiency" in Kazakhstan, state news agency Kazinform reported.

Several top Kazakhstani officials, including Prime Minister Serik Akhmetov, have commented on the need to ensure that the devaluation does not spark a hike in prices.

The mayor of Kazakhstan's former capital and largest city Almaty, Akhmetzhan Yesimov, also issued a statement saying that officials had been instructed to step up monitoring efforts to prevent a rise in prices, with particular attention to prices of food and essential commodities.

The previous devaluation in 2009 was followed by an immediate increase in prices for food and consumer goods, with many retailers closing their doors on the day of the devaluation to relabel their goods.

Despite the official assurances, it has been a similar situation today. Some shops including white goods retailers and supermarkets have already closed their doors while prices are raised. Other retailers saw an increase in trade after the devaluation was announced as shoppers decided to stock up before an expected overnight price increase.

Rental payments in Kazakhstan are almost always set in dollars to protect landlords against fluctuations in the tenge, meaning that the impact of the devaluation will immediately be passed on to renters who will see their next monthly payments increase in tenge terms.

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