Why Swim Against the Flow?

On September 7, 2018, Forbes.kz published an article called «Murat Temirkhanov: The National Bank is Scared of the Strengthening of the Tenge Against the Ruble». In the article, «famous Kazakhstan economist, interim Chairman of Halyk Finance JSC talks about the decrease of the tenge exchange rate». 

Earlier, Halyk Finance, in its commentary on the National Bank’s decision to keep the base rate, talked about the completely foundationless devaluation of the tenge and accused the Regulator of inaction. As for the Forbes.kz publication, its most interesting part consists of the discussion between the experts and the Regulator’s representatives.

Here is what Temirkhanov had said (text in bold by kz.expert).

«At the meeting, the discussion had primarily evolved around the sensitive topic of the national currency exchange rate. Generally speaking, the NBK has only one main argument re the tenge devaluation. Particularly, they say that not only the tenge and the ruble are decreasing against the dollar but the other currencies of the developing countries are weakening as well. In it turn, the Regulator explains the currency weakening by the fact that the increase of the key interest rates in the US has led to the outflow of the foreign capital from these countries. As one NBK’s representative has put it,«why would we go against the flow»?

Murat Temirkhanov: «I completely disagree with this argument». First, because, in his words, «Kazakhstan has no ‚flow‘ called outflow of the capital from the developing countries». Second, because, in Russia «the devaluation of the ruble against the dollar has almost entirely happened due to the sanctions and not because of the key interest rates increase in the US», therefore, in his and his colleagues’ opinion, the serious weakening of the tenge during these past days is completely foundationless.

He presents his own explanation re the decrease of the national currency exchange rate.

«At the latest meeting of the National Bank’s specialists and the experts, one idea had been voiced albeit indirectly: The Regulator does not care to what extent the tenge would decrease against the dollar, it is concerned that the tenge would rise against the ruble. In particular, at this meeting, two Heads of the NBK’s key departments recalled the end of 2014 and the beginning of 2015 when the tenge rose significantly against the ruble and almost entire Kazakhstan rushed to Russia to buy the drastically cheapened goods».

«Another Head of the NBK’s department said it point blank under my post on Facebook, «as for the hypothesis of being tied to the ruble, we are tied to Russia in principle, 40% of our import comes from there. And if the tenge will rise against the ruble, this number will be greater while the GDP and everything else related to it will be lower».

As a result, Murat Temirkhanov reaches the following conclusion.

«I believe it is precisely because the National Bank is scared of the rising of the tenge against the ruble, the tenge is weakening after the ruble contrary to the fundamental factors that have emerged in Kazakhstan. Such an illogical current exchange rate’s behavior has increased the devaluation expectations which is clearly shown in the August monthly survey conducted by the Regulator. I am certain that the September results will demonstrate an even greater increase of the devaluation expectations. This promises to become a very negative trend since the growth of the devaluation expectations means only one thing: the lowering of the trust in the national currency and the National Bank’s policy which, eventually, will take toll on the entire economy».

It seems like, in this case, the interim Chairman of Halyk Bank is incorrect in, first, ascribing to the National Bank the fear of the tenge strengthening against the ruble and, second, in using this fear as an explanation for the weakening of the tenge against the US dollar.

This error can be easily explained by the fact that, as a professional financier, he approaches the matter from the technical standpoint and, not seeing the fundamental reasons for the weakening of the Kazakhstan national currency, is trying to find a different, subjective explanation for the current events choosing, as it is customary in such cases, to place the blame on the state, namely, on the National Bank of Kazakhstan.

In the meantime, we believe we can trust the National Bank in this case — the tenge as the currency of a state with a developing economy is influenced by the external negative political and economic processes. The extent of this influence is determined primarily by the quality of a given economy and state finances. Therefore, it looks like, this time, the representatives of the National Bank spoke the absolute truth when responding to the experts’ complaints — «Why would be swim against the flow»?

There is all the more reason for this since, paradoxically, for the budget of the countries with a big share of the resource sector in the economy, the countries where a big share of the GDP and the export consists of oil and gas, the weakening of the tenge as well as of the Russian ruble strengthens the state finances.

Under these conditions, attempting to prevent (stop) the weakening of the national currency is not only dangerous since it leads to the spending of the foreign currency reserves but also senseless from the economic standpoint. We will recall that the National Bank’s support of the tenge in 2014-2015 that had cost Kazakhstan about US 40 $ bln pursued the solely political goal — to ensure the domestic political stability before and after the early Presidential elections. 


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