New Kazakh central bank governor goes back to free float

New Kazakh central bank governor goes back to free float
By bne IntelliNews November 6, 2015

The National Bank of Kazakhstan, the central bank, has re-adopted a free-floating exchange regime under the new governor, Daniyar Akishev, who has allowed the national currency, the tenge, to devalue by 7% since he replaced Kairat Kelimbetov on November 2. 

“With the aim of preserving gold and foreign exchange reserves of the National Bank and the National Oil Fund the National Bank has adopted a decision to minimise its involvement in the foreign currency market from November 5, 2015,” the central bank said in a statement on November 5. “This corresponds to the earlier announced policy of the National Bank on a free-floating exchange rate and a switch to inflation targeting.”

The move marks a departure from the in effect managed exchange rate policy adopted by Kelimbetov less than a month after he announced the abolition of the trading corridor for the tenge’s exchange rate on August 20, allowing the national currency to float freely. That announcement had resulted in a nearly 30% slump in the value of the tenge against the dollar.

The central bank explained that the Kelimbetov-led National Bank had departed from the free-floating exchange rate regime in September and October when it resumed interventions in the currency market, which according to the statement, reached 60% of total trade. As a result, the bank burnt over $5bn on propping up the tenge. 

However, the central bank reiterated its right to resume interventions to “smooth significant fluctuations in the exchange rate that do not reflect demand and supply and existing fundamental factors”.

The suspension of interventions led to a 5% devaluation of the tenge against the dollar, closing at KZT299.43 on November 5, which “doesn’t pose a threat to financial stability and doesn’t contradict the National Bank’s objective of achieving price stability”, the bank said.

Akishev’s new exchange rate policy could allow the tenge to bottom out at close to KZT5 against the Russian ruble, which the market expects despite the government’s denial of a direct link between the exchange rate of the tenge and that of the ruble – the currency of Kazakhstan’s largest supplier which accounts for a third of all Kazakh imports. This should settle the Kazakh currency at around KZT320-350 to the dollar, depending on the exchange rate of the ruble against the greenback.

Kelimbetov, who presided over a 19% devaluation of the tenge in February 2014 only a few months after his appointment as chairman of the National Bank in October 2013, had repeatedly claimed for political reasons that there would be no devaluation of the tenge despite the falling oil price and the weakening Russian ruble: a “second wave” of devaluation expected since February 2014 would have further shuttered little trust the Kazakh population and businesses had in the national currency.

The reason for delaying devaluation after February 2015 was the announcement of a snap presidential election in April and a string of national holidays which culminated with Astana Day on July 6 which coincided with President Nursultan Nazarbayev’s 75th birthday. This delay had cost the National Bank dearly: it had spent $28bn on maintaining the exchange rate of the tenge between February 2014 and August 2015.

Despite the continuing pressure on the tenge to devalue, at a secretly-organised news conference for loyal media outlets ahead of the IMF’s presentation of a Central Asia regional economic outlook in Almaty on October 23, Kelimbetov maintained the “optimal” exchange rate was at KZT250-270 to the dollar and the then rate of KZT279 was “balanced”.

While the speed and length of the depreciation of the tenge remain uncertain, the re-adoption of the free-floating exchange regime has now brought some certainty to the National Bank’s short-term monetary policy and will undoubtedly save billions of dollars in foreign exchange reserves.

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