Kazakhstan’s tenge plunged a record 23 percent after the country relinquished control of its exchange rate, becoming the latest emerging market to abandon efforts to prop up its currency after China devalued the yuan.
The nation has switched to a free float and will pursue an inflation-targeting monetary policy, Prime Minister Karim Massimov told a government meeting in Astana. Supply and demand will determine the exchange rate, central bank Governor Kairat Kelimbetov said, adding that there will only be intervention if stability is threatened. The tenge sank to an all-time low of 257.21 per dollar in Almaty, data compiled by Bloomberg show.
Central Asia’s biggest crude exporter is contending with sliding oil prices and weakening economic growth in China and Russia, its top trading partners. Most emerging-market currencies depreciated this month as the yuan’s steepest slide in two decades and speculation of a Federal Reserve rate increase spurred outflows.
The “move follows a huge loss of competitiveness, as key trade partner Russia has allowed the ruble to depreciate significantly as commodity prices slumped,” Tom Levinson, the chief foreign-exchange and rates strategist at Sberbank CIB in Moscow, said by e-mail. The yuan’s depreciation “may be an additional factor,” he said.
Russia let the ruble float freely and switched to inflation targeting in November after spending about $90 billion last year from reserves trying to contain the depreciation.
The ruble has lost 46 percent of its value in the past 12 months, versus a 7.6 percent weakening for the tenge before today’s switch. As a result, Kazakhstan witnessed an influx of grain, metals, construction materials, oil products and coal from its northern neighbor, according to Kazakh business association Atameken.
Must Adjust
Vietnam devalued its currency on Wednesday for the third time this year. Kazakhstan’s central bank widened the tenge’s trading band against the dollar the same day, raising its upper trading limit to 198 per dollar.
The shift by Kazakh monetary authorities could trigger similar moves by regional peers, “which would be tempted to stem competitiveness losses,” BMI Research said in a note on Wednesday, after the band widening. “We assess Tajikistan and Kyrgyzstan to be most vulnerable to the weakening of the Kazakh tenge.”
Kazakhstan, the world’s 18th largest producer of petroleum and other liquids, must adjust to living with a crude price of $30 to $40 per barrel, president Nursultan Nazarbayev said at meeting with state officials on Wednesday. Brent crude has plunged 59 percent from its 2014 high and is now trading at $46.91 per barrel in London.
‘Correct’ Imbalances
The tenge should stabilize in five to seven days, Governor Kelimbetov said, adding that the central bank isn’t targeting any particular exchange rate. Nomura Holdings Inc. said in an Aug. 12 note the currency would need to weaken to between 235 and 268 per dollar to “correct” imbalances due to the slide in commodity prices and the overvaluation of the real effective exchange rate.
The shift to a free float “will create the necessary conditions for a recovery of economic growth, increased lending and investment activity, creation of new jobs and a decrease in the inflation rate to between 3 percent and 4 percent in the medium term,” Prime Minister Massimov said.
The nation’s gross domestic product grew 4.3 percent in 2014 and inflation was 3.9 percent in July, down from 7.4 percent in December.
“Kazakhstan like a number of other emerging countries, are trying to remain competitive at a time when the dollar is strengthening,” said Gary Dugan, chief investment officer for private banking at National Bank of Abu Dhabi PJSC.
source: Bloomberg
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