Perfect storm looms large for Central Asia, Caucasus currencies

By bne IntelliNews August 27, 2015

Jacopo Dettoni in Almaty -


Currencies in Central Asia and the Caucasus remain on shaky ground as a poisonous mix of falling commodity prices and economic slowdowns in major trading partners is proving contagious for the whole region.

“There is a perfect storm forming for currencies of South Caucasian and Central Asian states, including Azerbaijan, Uzbekistan, Kyrgyzstan,” says Lilit Gevorgyan, a senior analyst for Russia and the Commonwealth of Independent States (CIS) at IHS Global Insight. “It is a combination of currency jitters triggered by the Chinese economic downturn and latest currency devaluation; crude oil and commodity prices slump; geopolitical troubles in the wake of the simmering Ukraine crisis and resultant decline of the Russian economy and its currency’s exchange value.”

“The anticipated US Federal Reserve’s interest rate hike is expected to make matters worse for these countries and their currencies,” she adds.

The sudden collapse of the Kazakh tenge on August 20 after the authorities abandoned the currency trading corridor and moved to a free floating regime dragged down currencies across the region. The Kyrgyz som and Tajik somoni were knocked down straight away as official exchange rates touched historic lows and the difference between the official and street rates reportedly widened by up to 6%. The Georgian lari and Armenian dram followed suit, with both currencies heavily depreciating. Pressure also mounted in countries that retain strict control over their currencies such as Azerbaijan, Turkmenistan and Uzbekistan, despite all keeping their official exchange rates untouched.

“The painful blow is most felt by countries like Uzbekistan and Kazakhstan, that are vulnerable to world energy and commodity prices and have Russia and China as their key trading partners,” Gevorgyan explains. “It is only to be expected that their currencies will falter, unable to withstand external pressures. Azerbaijan is in a similar situation, too.”

Oiling wheels of depreciation

The price of Brent crude oil touched a six-year low of $43 per barrel on August 26 and the price of mining commodities such as copper and gold have quickly burnt up the gains of the last few years. Within this context, commodity-rich countries in Central Asia and the Caucasus used hard-currency revenues to prop up exchange rates. At the same time, Russia faces deepening economic woes as GDP shrank by 4.6% in the second quarter, reducing trade and remittances with the whole region and further affecting hard-currency revenues at a local level.

Kazakhstan’s government was eventually forced to ditch the tenge peg to a basket of foreign currencies (dollar 70%, euro 20%, ruble 10%) after burning through as much as $28bn between 2014 and 2015 to maintain the exchange rate, prompting the currency to fall to KZT255 to the dollar from KZT197 in a blink of an eye on August 20.

With the tenge swinging wildly in its first free days as a free-floating currency –  by August 27 it had recovered to trade at around KZT225 to the dollar – people across the country are now holding their collective breath waiting for a mid-term equilibrium price to emerge. “I think it will fall down to 275 in the next coming weeks, but they won’t let it fall beyond 300,” Anuar Ushbayev, managing partner at Tengri Partners, tells bne IntelliNews.

Kazakhstan’s monetary shakeup follows on the heels of Azerbaijan’s February decision to change the manat peg to the dollar, which resulted in an immediate 35% depreciation of the currency, but is now providing Azerbaijani authorities with some room to maintain the current exchange rate of AZN1.0475 to the dollar. “The central bank has all the resources to maintain the manat,” Oqtay Hagverdiyev, former head of the pricing, economic and fiscal policy department of the Azerbaijani cabinet, told Trend news agency on August 26, noting that no new devaluation is expected in 2015.

On the other hand, the Uzbek authorities have constantly avoided acknowledging the current difficulties, and the official fixed exchange rate is hugely overvalued, as shown by a 80% difference between the official rate and the som’s street rate. Yet the Uzbek monetary authorities reportedly keep a tight grip on official convertibility for business purposes and outflows of hard currency, which could provide some scope to maintain the official exchange rate.

Jahongir Abdurasulov, deputy director of the licensing and credit institution regulation department of the Central Bank of Uzbekistan, was quoted by Trend as saying that since Uzbekistan is a non oil-exporting country, the som will stay untouched by fluctuations in the oil price. Yet Uzbekistan is a major exporter of natural gas, the price of which is falling and in contracts is often index linked to that of oil. Gas export revenues for Central Asia’s largest gas exporter, Turkmenistan, whose authorities devalued the manat by 19% in January, are forecast to drop by 24.7% to $13.95bn in 2015, according to figures from the International Monetary Fund (IMF)

“Countries like Armenia or Kyrgyzstan that are energy resource poor could benefit from low energy and commodity prices,” IHS’ Gevorgyan says. “But these benefits are wiped out by the pressure that is building on their currencies due to the weakening of the Russian ruble or Kazakh tenge. Subsequently, their currencies too take a hit, fueling inflation and undermining final spending.”

Kyrgyzstan’s economy is proving relatively resilient to the current external challenges, with annual GDP growth standing at 8.7% in the first seven months of the year. Yet remittances, mostly from Russia, which make up around one-third of the annual GDP, fell by 25% in the first half of the year as the slowdown in the Russian economy combined with the ruble collapse to hit the flow of remittances both in volumes and monetary terms. Tajikistan and Armenia, where remittances made up 46% and 16% of 2014 GDP respectively, face the same troubles, with inward remittances down by over 30% in the first half of 2015.

Meanwhile in Georgia, the recent depreciation of the lari quickly escalated into a political quarrel where the central bank drew criticism from the ruling party, while the opposition blamed the government’s incompetence for the instability of the lari.


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