On the Fall of the Tenge and the National Bank Policies

It is quite feasible that the 500 tenge per one US dollar exchange rate becomes reality by the end of 2018 if the oil prices will drop to the $40 per barrel mark and the US currency weakens.

The negative forecasts on the tenge exchange rate have forced us, once again, to examine the pre-New Year interview of the National Bank Chairman Daniyar Akishev. This time, we will comment on what he said about the currency regulation.

Here is a quote (bolding ours – Kazakhstan 2.0).

“More than two years have passed since the we introduced the floating exchange rate. During this period, the expert community has divided into two groups. The first supports our decision, the second continues criticizing it up to this day. This decision has been dictated by the monetary policy of targeting the inflation.

The effectiveness of this regime has been confirmed by a number of scientific and empirical research as well as by the practices of other countries. Let me explain. In the conditions of the targeting inflation regime, the central bank’s only goal is to decrease and stabilize the inflation at a low level. The additional goal to target the exchange rate will not ensure the “independence” of the monetary policy since, in this case, the central bank’s interest rate policy will constantly be changing following the exchange rate shocks. Throughout the history of our independence, we have tried several currency exchange rate regimes including the non-obvious tying of the tenge to the US dollar. And this had inevitably led to building the imbalances in the economy due to the high inflation and the external shocks sprung by the world economic and financial crises. And the forced devaluation of the tenge was the outcome of this practice.

We all remember the social tensions caused by this step. We remember how the trust to the tenge decreased and how quickly the people started to convert their savings to the international currencies. I will also remind you that, to support the tenge exchange rate at a certain level, the National Bank of Kazakhstan, in the conditions of the fixed exchange rate regime, would spend the international reserves, in other words, the country’s safety “pillow”. However, a moment would inevitably come when the resource spending would not pay off.

The current exchange rate policy is based on the market factors, allows to avoid building the imbalances in the economy, and ensures the competitiveness of the domestic producers. In the conditions of the floating exchange rate regime, the situation has improved significantly, the currency market has balanced itself in terms of supply and demand. This does not mean there are no factors that can move the market to one direction or another, however, in this event, the regulator has enough instruments to keep the situation under control. Therefore, one should not be threatened by the everyday tenge exchange rate fluctuations whether it is the strengthening or the weakening of the currency. It is the daily currency fluctuations that allow to exclude the possibility of an instantaneous and significant change of the tenge exchange rate. In its turn, the National Bank of Kazakhstan is prepared, as and when necessary, to participate in the currency trading to cushion the destabilizing hopping of the exchange rate.

Now let us examine the outgoing year currency market trends and indicators.

First, the volatility has decreased. This year, the tenge exchange rate has fluctuated in the corridor of 310.4-345 tenge per US dollar (+/-5-6% of the average value). Second, the National Bank’s level of participation in the currency trading has significantly decreased compared to last year (less than 2% of the total volume of 11 months trading). It means that the market can independently determine the exchange rate without significantly overevaluating or underevaluating it. Another bonus lies in preserving the country’s resources. And this is an important non-financial outcome – the gradual rebuilt of the people’s trust to the tenge and the decrease of the dollarization”.

We are purposefully quoting this part of the interview in its entirety to preserve Daniyar Akishev’s reasoning and argumentation. Note that, to support the regulator’s policy, he cites last year’s trends and indicators that were quite successful for Akorda. In the meantime, we can offer another explanation for the decrease of the volatility of the national currency rate.

It is customary to believe that the tenge rate, as well as that of the Russian ruble, is directly dependent on the world oil prices. This thesis is practically an axiom. However, in 2017, the Kazakhstan national currency did not react as violently to the oil price fluctuations as it did in the year 2016. At the beginning of January 2017, with the Brent prices of $55.5 per barrel, the exchange rate was fluctuating around the 333 tenge per US dollar mark. At the beginning of 2018, the exchange rate stays the same although the Brent prices have topped the $66 per barrel mark.

The matter is that the rise of the oil prices at the international markets is usually accompanied by the cheapening of the dollar. During last year, the dollar index against the six currencies basket had dropped by more than 9.8% (the lowest indicator since 2003). Therefore, the relative stability of the Kazakhstan national currency exchange rate in 2017 had to do not so much with the effective National Bank’s policies as with the fact that the oil prices growth had been balanced out by the dollar exchange rate decrease.

In practical terms, it means that, if the current situation at one of the major goods market will remain the same in 2018 or change insignificantly, the National Bank has a chance to preserve the current exchange rate in the corridor of 330-340 tenge. If not, then Daniyar Akishev would have to search for an explanation why the things did not turn out the way he had promised and why he personally was not responsible for it.

One last thing. Judging by the words of the National Bank Chairman about trying out several currency exchange rate regimes in the past, this is exactly the way the agency as well as Akorda form their economic policies. They try out options. This seems quite reasonable: as opposed to independent experts who risk only their reputation, the statesmen are bound hand and foot by their previous decisions both their own and somebody else’s, the necessity to find albeit crooked but nonetheless workable solutions, the opinions and positions of their subordinates, their colleagues, etc.

In other words, the statesmen cannot jump above their heads by proposing and implementing the truly revolutionary decisions. This results in the fact that Akorda, like turtle forced to crawl over rough terrain, will have to continue enduring all the inconveniences of the high dependency on the factors beyond its control such as oil and metal prices, and be happy when the situation is working (at least one bit) to its advantage. Therefore, the actual economic course is not going to be as successful as it is constantly being painted by the public figures such as Daniyar Akishev.

So far, he has been lucky. This, however, does not mean that the show will go on forever. The oil prices may drop to the $40 per barrel mark and the US currency may not gain strength or may become even weaker since it works to the advantage of the US that is trying to increase the competitiveness of the domestic producers and goods. And then, the 500 tenge per US dollar exchange rate will seem to be feasible by the end of 2018.


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