Kazakhstan succumbs to allure of currency wars

The oil-rich nation devalued the tenge by nearly a fifth. It makes sense: there’s no reason to use up currency reserves to resist a move that has many advantages and few drawbacks. Stronger countries than Kazakhstan would struggle to avoid the global game of beggar-thy-neighbour. Kazakhstan’s central bank devalued its tenge currency by 19 percent on Feb. 11 and said it would protect it from sharp moves away from the rate of 185 per dollar. Kazakhstan’s net gold and foreign currency reserves stood at $24 billion on Jan. 31. Total international reserves were at $95.1 billion, including $71.1 billion in the National Fund, which collects windfall revenue from oil exports. Kazakh Finance Minister Bakhyt Sultanov said on Feb. 11 the official 2014 inflation forecast would remain unrevised at 6 to 8 percent despite the devaluation of the tenge. === Kazakhstan chose to devalue the tenge by nearly a fifth. The oil-rich country was sensible. There’s no reason to use up currency reserves to resist a move that has many advantages and few drawbacks. Stronger countries than Kazakhstan would struggle to avoid the global game of beggar-thy-neighbour. The central bank said its 19 percent devaluation would puncture speculative pressure on its currency and avoid instability in markets and the economy. It also pointed to uncertainty about the currency of the country’s main trading partner, Russia.That is all true, but not the whole story. The tenge devaluation dwarfs the Russian currency’s depreciation this year, roughly 5 percent. It is also a far larger fall than might have been expected from a country which is far better placed to fight off speculators than, say, Ukraine. Kazakhstan had $24 billion of gold and foreign currency reserves at the end of January. It’s total international reserves total $95.1 billion, after taking into account a fund which collects windfall revenue from oil exports. That is a comfortable 42 percent of GDP or 19 months of import cover, according to Tim Ash at Standard Bank. A September IMF health check said medium-term growth prospects were strong and external competitiveness had improved somewhat. The current account remains in the black, even though the surplus has shrunk quite a bit. Hardly the picture of a country in dire straits. But there were good reasons to devalue. It should deter speculators. It will help the country’s commodity exporters, which have dollar earnings and tenge costs. It might support non-commodity exports. The great risk of devaluations is inflation may be sparked by more expensive imports. An extensive system of administered prices gives the government some protection. Kazakh companies with dollar loans might be somewhat exposed, but are likely to be hedged. With so many pros and so few obvious cons, it’s hardly surprising Kazakhstan decided not to waste precious foreign exchange reserves defending its currency at stronger levels. Still, if a country in relatively good health can’t resist playing currency wars, no wonder it’s such a popular global game. ============= UPDATE 3-Kazakhstan devalues tenge by 19 percent to stymie speculators Tue Feb 11, 2014 7:35am EST 0 Comments•Tweet •inShare.2•Share this••Email•PrintRelated Topics •Currencies » •Markets » •Financials » * Central bank to avert sharp moves off 185 tenge/dollar * Seeks to counter impact of "uncertain" rouble, U.S. policy * Analyst sees tenge devaluation "larger than justified" By Mariya Gordeyeva ALMATY, Feb 11 (Reuters) - Kazakhstan on Tuesday devalued its tenge currency by 19 percent to about 185 per dollar, taking the wind out of the sails of speculators and adjusting to the freer rouble float of its main trading partner Russia. Kazakhstan's tightly managed float was undermined by Russia allowing the rouble to slide in a broader investor retreat from emerging market currencies sparked by the scaling back of U.S. monetary stimulus. Analysts were surprised by the size of the move, which was far larger than the rouble's 5 percent decline this year, and reflected a desire to put a floor under the currency of the Central Asian nation, a big exporter of energy and commodities. "From a qualitative perspective it makes sense. The quantity ... is way too much," said Ivan Tchakarov, a Moscow-based economist at Citi who covers Russia and the Commonwealth of Independent States. The central bank said it had targeted an exchange rate of 145-155 tenge to the dollar in the last few years, with a mid-point of 150. The shift of the mid point to 185 tenge to the dollar represents a 19 percent devaluation. Political turmoil in ex-Soviet Ukraine has forced the central bank there to loosen its grip on the hryvnia currency, which has lurched lower as President Viktor Yanukovich battles to contain a balance of payments crisis. Russia has suspended a $15 billion bailout until a new government can be formed. Shortly after the central bank's announcement, the official rate of the tenge fell to 163.90 to the dollar from 155.56 on Monday. By 1140 GMT, the tenge fell by 18.81 percent to 184.99 per dollar on the Kazakh interbank market. "The National Bank will protect the tenge from sharp moves ... away from the new level of 185 to the dollar," central bank governor Kairat Kelimbetov told a hastily-called news conference in Almaty, the country's financial hub. The central bank said earlier that it would ease support for the tenge and reduce currency interventions. It said its decision was coming into force immediately. "Potential for speculative and inflationary expectations has now been exhausted," Kelimbetov said in reference to the central bank's devaluation move. The bank said its actions had been prompted by volatility on international markets caused by the U.S. Federal Reserve's gradual withdrawal of its quantitative easing policy. ROUBLE'S "UNCERTAIN" RATE Northern neighbour Russia remains Kazakhstan's main trade partner, and the bank said its move had also been prompted by "the uncertainty of the exchange rate of the rouble". In order to avoid instability on the financial market and in the economy in general, the central bank said it had established a corridor of tenge rate fluctuations at a level of 185 per dollar plus/minus 3 tenge. Kazakh Finance Minister Bakhyt Sultanov told a news conference he was confident that Kazakhstan would not revise its official forecast for inflation of 6 to 8 percent this year. But Akhmetzhan Yesimov, the powerful mayor of Kazakhstan's commercial capital and largest city Almaty, told a government meeting on Tuesday that he would welcome rigid state controls on flour and bread. He said some shops in Almaty were limiting sales of some staple foods to shoppers. He did not elaborate. Kazakhstan, a vast Central Asian country of 17 million people, is the second largest post-Soviet oil producer and the second-largest post-Soviet economy after Russia. Together with Belarus, the three have formed a joint Customs Union. Yaroslav Lissovolik, head of research at Deutsche Bank in Russia, said the new round of tenge weakness was "understandable - trade ties if anything have become stronger". One of the reasons behind the devaluation was Kazakhstan's worsening balance of payments due to rising imports, mainly of consumer goods, the central bank said. The share of deposits in foreign currency at local banks had been growing through the course of last year, an indicator of increased devaluation fears, Tchakarov said. In February 2009, Kazakhstan devalued the tenge by 18 percent to 150 per dollar plus/minus 5 tenge, after prices for its commodity exports dwindled during the global crisis and Russia's rouble weakened. In 2010 Kazakhstan widened the currency corridor to 127.5-165.0 per dollar. In February 2011, the central bank gave up the currency corridor mechanism and returned to a managed float of the tenge. Last September, Kazakhstan's central bank pegged the tenge to a basket of currencies, including the dollar, the euro and the rouble, introducing a system similar to that used by Russia. ================