Sharp rise in recent months of the trade volume on the Kazakh market of foreign currency swaps is attracting the attention of analysts yet again. Recently National bank of Kazakhstan was forced to clarify on the subject.
It was published by the center of business information “Kapital.kz” and ended with this statement:
“Overall we consider speculations on the so-called “hot” situation on the currency market to have no grounds. At present time the exchange rate is a market one, i.e. it is formed on the basis of demand and supply on the currency market. Situation on the domestic currency market is stable. We observe daily fluctuations of the rate characterized by moderate volatility. As it was often mentioned, major factors, influencing the formation of rate of tenge are oil prices currency rates of trade partner countries. At the same time the tenge rate is also influenced by many other factors such as: the state of the payment balance, level of inflation, interest rates, state of the foreign debt, as well as seasonal factors (tax week)”
Still, you cannot call the dynamic of volume of deals at the market of currency swaps a normal one. Below, we offer to our readers a table, prepared by us based on official data of the Kazakhstan stock exchange on the results of its activity from January to May of 2017.
From the table, it follows that the activity of participants of the stock exchange in the current year is abnormally high, and not only on the FX swap market, but also on the repurchase agreements market. Also, autorepo is both by government and non-governmental securities. Evidently what is happening is the result of surplus tenge liquidity in the banking system of the republic.
National bank of RK explains the latter as (we are quoting the aforementioned explanation of regulator to the Center of business data “Kapital.kz”):
In current state of the surplus of tenge, National bank on the daily basis does operations on liquidity take out, including operations of the currency swap on KASE, with the goal of supporting the rates of currency market close to the mark of the base rate. As of June 9th 2017 net operations of the National bank as a result of realization of currency-loan policy was (-) 2.7 tril. tenge, including liquidity take out through placing of notes of the National bank in volume of around 3 tril. tenge of which around 0.5 tril. tenge are 1 year notes.
Increase of volumes on the swap market is explained by following factors:
1. From the first quarter of 2016 based on strenghening of American dollar against tenge and taken measures on dedollarization of economy, there is an observed constant growth of surplus of tenge liquidity of the banking sector, Physical and legal entities give a preference to national currency. Second grade banks and economic agents get available means for investment activity.
2. A relatively high market rate for tenge instruments stimulates banks to make a profit by placing of available liquidity in national currency. Similar situation is on repo market with stable trade.
In current situation economic agents, on the contrary, are lowering assets in foreign currency, while growing portfolio of assets in tenge. They invest in such instruments as repo and FX swap, as well as instruments of the National bank. In such situation, participants of the market are making money. Record volume of FX swap deals in may, at the level of 28.9 bil. USD represents the sum of daily-prolonged one and two-day deals, throughout the month. Thus, at the last day of may the volume of open FX swap deals was around 2.9 bil. USD.
Thus, National bank of RK confirmed suspicions voiced by us earlier, that unusual volume of trade in the FX swap market is explained by second-grade banks converting foreign currency into tenge and using it to acquire notes of the National bank of RK. However, having given the explanation of what’s happening on the financial market of the republic and calming those who were afraid of a new devaluation of tenge, regulator was quite about another, less critical danger for the economy of republic.
The thing is that by aiming to target inflation and fulfilling de-dollarization of financial system, National bank of RK with its actions, including informal ones, create such a big surplus of liquidity of tenge that we can speak of a bubble.
For now regulator is dealing with this problem through a sharp rise in the volume of its notes in circulation, but such a state of affairs cannot last long. This is because, banking system’s main goal is to redistribute available funds and to credit subjects of the economy. Instead, National bank de-facto is against the growth of loan giving, since it gives a chance to B-grade banks to make good money with minimal risk.
At the same time, profits of national bank when issuing notes, are the profits of those who buys these notes. And the volume of these notes is comparable with the total profit of second-grade banks. If net of operations of National bank as a result of realization of currency-loan policy will stay by the end of the year at the same level as on 9 2017, i.e. 9-) 2.7 tril. tenge, then for the year, profits of banks will be 300 bil. tenge.
Evidently, what’s going on cannot be the mistake of administration of the regulator. Most likely, Daniyar Akishev and his colleagues are forced to, first of all, solve problems of the financial system step-by-step and secondly indirectly support domestic banks of the second-grade in the conditions when profitability of the sector is heading to zero. However, the fact that growth of crediting of the national economy, prevents not only crediting of many borrowers, absence of new quality loan receivers, lack of competitiveness of enterprises and entire branches of economy, is confusing. Overall, current policy of the national bank creates a lot of questions; by solving two of the aimed targets – lowering of inflation in the country and de-dollarization of financial system, regulator de-facto creates problems for the government and most importantly to the actual economy. And the question of how the problems will be solved, remains open while neither National bank of RK nor Akorda has the answer.
