Multiple Central Asian currencies, including the Kazakh tenge, the Uzbek sum and the Tajik somoni have hit new lows within the past couple of weeks.
As of August 28, Uzbek central bank figures showed the Uzbek sum (UZS) had depreciated by 12.38% to UZS9,373.9 against the dollar since the start of this year. The official rate of the Tajik somoni (TJS), meanwhile, fell 2.75% to TJS9.7 against the USD on August 20, recording its largest adjustment in over two years, and stood mostly unchanged as of August 28.
The Kazakh tenge (KZT) hit a new official historic low of KZT387.73 to the dollar on August 9, but as of August 28 had slightly appreciated to KZT387.5, according to figures out of the National Bank of Kazakhstan (NBK). However, exchange offices around the Kazakh commercial capital of Almaty were trading at as low as KZT390 to the dollar, and were occasionally venturing beyond that threshold. The tenge’s downward slide began back on July 25.
The decline of the tenge is not as dramatic as that of the Uzbek sum. It abruptly jumped from UZS8,708 to the greenback on August 16 to UZS9,061 on August 17. The causes behind the depreciation of the currencies are nevertheless approximately the same—the difficulty is largely caused by dependence on the Russian economy.
It appears that the trajectory of the tenge has mostly tracked the Russian ruble (RUB). It hit a six-month low on August 19 having also hit the slippery slope in mid-July. Also likely is that as the tenge started weakening, Kazakh citizens began panicky buying of dollars at exchange offices, further spurring weakness in their national currency.
Earlier in August, Kazakh authorities announced a regulation limiting the working hours of exchange offices and setting a requirement on exchange bureaux to keep records of their clients based on their internal Kazakh ID passports. The measures were likely determined in order to discourage people from conducting currency exchange operations and thus hold back any downward pressure that might be brought to bear on the tenge due from any spread of general panic. However, such limitations are only likely to exacerbate fears. They could potentially lead to heightened black market currency exchange activities.
The Central Bank of Uzbekistan has noted that the depreciation of the sum has been partly driven by inflation experienced by the ex-Soviet state’s main trading partners, including Russia, Kazakhstan and China, seen since the second half of July—but the central bank also observed that rising foreign currency demand from Uzbek importers played a major role as well. This is mainly a side effect of the Uzbek government’s reform drive to open up the country.
Besides trade, much of Uzbekistan’s foreign currency comes from migrant workers abroad, the vast majority of whom work in Russia. Remittances by Uzbek migrant workers make up around 10%-15% of the country’s economy.
As a result of the pressures, the Uzbek central bank announced on August 20 that it would no longer set limits on exchange rate fluctuations and it went ahead with the complete removal of the floating exchange rate corridor.
Similar dependence on Russia can be observed in Tajikistan, one of the world’s most remittance-dependent countries. Remittances from Tajik migrant workers in Russia in fact make up as much as around one-third of its GDP.
In the cases of Uzbekistan and Tajikistan, it is plain that the downward trajectory of their currencies is more of an obvious inevitability. But the tenge is a more complicated beast.
Kazakh economist Arman Beysembayev told local news website TengriNews early in August that US sanctions imposed against Russia and the US trade war with China stood as the main culprits behind the heat felt by the tenge.
“We do not know the position and goals of the National Bank [Kazakh central bank], therefore, perhaps the tenge will continue to weaken. In the next couple of weeks, in this case, we can come to the level of 390-395, maybe up to 400. Maybe this will happen earlier. But the dollar will not go too far above 390," Beysembayev added.
Beysembayev also noted that “now we are ahead of the ruble in depreciation”.
On the more optimistic side, economist Almas Chukin told TengriNews that August is a historically bad month for the tenge.
“Every year we observe the same thing. Either people go on vacation, or dollars are not for sale. In fact, the tenge should strengthen, because the Fed decided to lower rates a couple of days ago after 11 years of increases. This should weaken the dollar. Strengthening will be in the region of 370-380 tenge within the next month," Chukin said.
There is, however, another factor that may influence the Kazakh currency—world oil prices.
Oil price pressures
There has been no discernible Kazakh currency market reaction to the sudden slide in the price of Brent crude seen in October to December of last year, when it crashed from $80-$90 to the lower end of $50-$60. Some Kazakh analysts believe the tenge has likely been artificially prevented from sliding, likely using transfers from the national fund, which the central bank does not have to report as interventions.
The tenge has remained more or less stable within a KZT375-KZT386 corridor, but you could say it has been on borrowed time since the beginning of 2019. Some Kazakh analysts back then speculated that the National Bank of Kazakhstan would be forced to let the tenge go eventually and expected the tenge to reach KZT450 to the dollar at some point this year.
When asked about this scenario, Kazakh analyst Vyacheslav Dodonov told 365info.kz news agency in February that “the depreciation of the tenge, in my opinion, is inevitable. It will be difficult to say whether this will be a slow process or an instantaneous one."
However, there was no attention-grabbing slide in the value of the tenge for much of the first half of 2019, with oil prices temporarily seen rising. It was after Brent crude hit the $72 per barrel mark in April that prices took a downward trajectory that is still ongoing. The crude price registered at $59 on August 27.
Given latest developments, the tenge appears to have been hit by a double whammy of ruble and oil price weakening, although the regulator has managed to stabilise the tenge for now.
Kazakh trust issues
Currency stability is no doubt an important policy for maintaining public trust. Following the “six devaluations” of the tenge against the dollar prior to the removal of the dollar-peg in 2015 and the switch to a free-float, 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 hard currency, which in turn weakens the local currency further. Kazakhs are still wary of keeping their savings in tenge.
Measures to prevent the tenge from sliding too far mainly prevent ordinary Kazakhs—many of whom engaged in the countrywide protests that broke out during and after the June 9 snap presidential election—from adding more grudges to their growing list of grievances against the ruling regime.
It follows that in order to build up confidence to allow the tenge to truly float freely, instead of constantly postponing the inevitable, the Kazakh authorities would need to take social and economic dismay more seriously. Some measures, such as the public spending programmes announced by newly installed Kazakh President Kasym-Zhomart Tokayev, and by predecessor Nursultan Nazarbayev before him, and debt relief might not be a bad start. Yet these measures will only temporarily treat symptoms of the problem—not the cause.
For instance, joblessness is a major factor of societal angst that often gets overlooked. Independent observers see underemployment at 14%-16% across the general population in Kazakhstan, Central Asia Caucasus Analyst wrote. A poll conducted by Kazakhstan’s State Statistics Committee, published this month, showed that only 60% of Kazakh citizens were satisfied with their quality of life. Social spending efforts supported by the national fund are unlikely to resolve these issues with any permanence.
At the same time, the need to maintain the stability of the tenge makes Kazakhstan’s economic diversification drive all the more important. The country is seeking to reduce reliance on hydrocarbon exports and, consequently, the tenge’s vulnerability to oil price fluctuations. It is unclear whether the authorities are doing a good enough job on this front as most of the focus has been taken over by the agricultural sector and Chinese investments in infrastructure. The latter reliance demonstrates a larger inertia within Kazakhstan to over-rely on a neighbouring economy, just as the country still holds on to its Soviet era economic links to Russia, binding the tenge to the ruble as a consequence.
The tightening of economic relations with China may come with a price of its own.
“The current weakening of the Chinese yuan is a very significant factor that also puts pressure on the exchange rate of the tenge," Kazakh expert Olzhas Tuleuov, deputy director of the Center for Applied Economics Research (CIPE), told InformBuro news agency on August 16. The Chinese currency began sliding on July 27 and continues to depreciate against the dollar amid the trade war anxieties and jockeying for position.
The stability of the value of the tenge relative to the yuan is important in maintaining optimal trade conditions between China and Kazakhstan, but a weaker tenge is also beneficial for the Kazakh side in this relationship, Tuleuov said.
"In this regard, the depreciation of the renminbi against the dollar requires a proportional or even greater weakening of the tenge against the US currency," he added.
Regional neighbour Tajikistan may also be feeling the effects of this linkage and dependence, but in neighbouring Uzbekistan’s case there might be hope for a multilateral approach to sources of investment and trade partnerships, with the Central Asian nation hopeful that it can draw in a substantial number of western investors with its ongoing reform drive.