Kazakhstan, its economy roiled by the global fall in prices of key earners oil and gas, may have to let its currency weaken further following the 18% devaluation earlier last week as the current account balance continues to worsen. On February 4, Kazakhstan's central bank devalued the tenge to the level of 150 to the US dollar and set up a 3% band around the new level. There was a hint of this coming when in mid-January Grigorii Marchenko was appointed the new chief of Kazakhstan's central bank.
Marchenko had previously held this post in the late 1990s, when knock-on effects of Russia's 1998 financial crisis then forced a devaluation of the tenge. In response to the devaluation just implemented, a number of the country's largest commodity producers traded on the London exchange have rallied strongly after over two weeks of decline.
The move by the government in Astana was a pre-emptive strike designed to catch speculators by surprise so that the currency would not be subject to the weakness shown by the Russian rouble over the last few months. (See: Rouble joins Russia's pointers to decline, Asia Times Online, December 4, 2008, and Rouble teeters on slippery slope, Asia Times Online, January 29, 2009.)
The country, where the central bank first started managing the currency in 2007, had sold US$1.6 billion in dollars in January to keep the tenge at its previous level, representing about 6% of foreign currency reserves.
A major problem is the risk for credit worthiness that the devaluation poses, through its potentially deleterious effects on the weak banking sector. Low prices for oil, a key earner for Kazakhstan, only increase that risk. Nevertheless, the tenge remains 17% stronger against the Russian rouble, another largely oil-backed currency, than it was in June last year.
An oil and gas dynamo, Kazakhstan's economic growth has for most of the present decade averaged an annual rate of 10%. This fell last year to 3.1% and is expected to decline further in 2009 to a rate of between 1% and 2%. Foreign observers consider it possible that the country will ask for help from the International Monetary Fund if the highly leveraged banks are still unable to keep their heads above water after devaluation.
Astana has also announced that it seeks to more than double the export tax on oil products in order to protect its domestic market. This move will chafe the foreign energy companies operating in the country, which have over the past two years endured threats of expropriation, re-negotiation of contracts, and the imposition of unforeseen export duties. Short of shutting down or decreasing production levels, however, for which they may be subject to financial penalties, there is likely to be little that they can do.
According to Bloomberg, Kazakhstan's credit-default swaps, a sort of insurance against default for bond-holders, are the fourth-most expensive in the world. A consensus is forming that ratings for the country's banks will be cut, since the devaluation increases the difficulty of repaying foreign debt. The price of the credit-default swaps is likely to increase.
Two days before the devaluation was announced, the government bailed out the country's four biggest banks. Specifically, Astana acquired controlling stakes in the two lenders with the highest levels of international debt, BTA Bank and Alliance Bank, effectively nationalizing them. At the same time, the BTA chairman and former leader of the political opposition, Mukhtar Ablyazov, was dismissed by the state regulator.
To two other banks, Kazkommertsbank and Halyk Savings Bank, the government took a different approach, taking stakes of only 25% in each. Coincidence or not, majority stakes in the latter are held by one of President Nursultan Nazarbaev's daughters and her husband, Timur Kulibaev. The sale of the state stake in BTA to the Russian Sberbank is reportedly under discussion. Moody's has already downgraded Temirbank, the eighth-largest in the country.
Despite the government's best efforts, this devaluation may not be the last, as the country's sovereign rating remains under pressure. There may be some short-term stability in the foreign exchange market, but it is likely that the current accounts balance will worsen.
Standard & Poor's Rating Service expects Kazakhstan's current account to decline from a surplus of 7.1% of gross domestic product in 2008 to a deficit of 2.1% this year, but notes that the country's fiscal and monetary reserves "remain substantial relative to nearly all peers" at 42%.
Although the tenge rebounded upwards from the 150 level in the first days after devaluation, it cannot therefore be excluded that downward pressure will increase and that the authorities will have no alternative to permitting a gradual slide. Unofficial estimates do not preclude further cumulative devaluation.
The Kazakhstani authorities may eventually adopt the sort of controlled float (also called a "dirty float") that Russia has recently implemented, where the currency is allowed to fluctuate within a rather wide band with only occasional intervention by the central bank. The tenge is unlikely to recover strongly before world commodity prices improve.
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First published in Asia Times Online, 12 February 2009.