Wednesday, 19 March 2014

The Cost of Black Tuesday for Kazakhstan

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By Birgit Brauer (03/19/2014 issue of the CACI Analyst)

The devaluation of the Kazakh tenge on Feb. 11, dubbed Black Tuesday, has further eroded the little trust people have had in the National Bank of Kazakhstan and the country's financial system. The news came as an unpleasant surprise for many Kazakhstanis who had believed the repeated assurances of the National Bank that there would be no devaluation. Even western financial analysts, who had anticipated the move, were taken aback by the scale of the devaluation.

 

 BACKGROUND: On February 11, the National Bank of Kazakhstan devalued the country's currency, the tenge, by 19 percent against the U.S. dollar. This was Kazakhstan's third devaluation since independence. The official rate of the tenge fell to around 185 tenge to the dollar from the previous rate of 155.5 tenge the day before. The bank announced that the nation's currency would be kept within a range of 182 to 188 tenge to the dollar.

National Bank Chairman Kairat Kelimbetov cited the pressure of global uncertainty and weakening of emerging market currencies, including the recent depreciation of the Russian ruble, as reasons for the devaluation. An even more important issue, he said, was the very pessimistic outlook for economic growth in Kazakhstan's trade partners, namely the European Union, Russia, and China. What he failed to mention was Kazakhstan's continued dependence on oil and high commodity prices, as well as problems related to non-performing loans in the banking sector, a legacy of the global financial crisis.

Given Kazakhstan's close trade, investment and financial ties to Russia and China, the country is particularly vulnerable to shocks in these economies. For example, Russia, from which Kazakhstan currently buys 38 percent of its imports, has been trying to grapple with a severe economic slowdown and a plunging ruble. Over the past year, the ruble has depreciated against the tenge by some 10 percent. Meanwhile, according to Kelimbetov, Kazakhstan spent US$ 2.7 billion from the national reserve between June and August 2013 and US$ 2.2 billion in January alone to prop up the tenge.

President Nursultan Nazarbayev, who spoke out on the devaluation only three days after the event, said it was a purely financial measure to support Kazakhstan's major companies with 10-40,000 employees each. It would give the economy additional profit and thereby spur growth.

The decision of the National Bank came precisely five years after the last devaluation. In February 2009, the tenge was depreciated by 18 percent due to the fallout of the global financial crisis. But unlike then, when the population resigned itself to the decision of the National Bank, many Kazakhstanis now were angered and felt deceived. 

The National Bank had consistently rejected any devaluation rumors since last summer.  Moreover, over the last few years, the National Bank had encouraged people to put their hard-earned money in local banks and maintain a substantial portion of it in local currency, instead of keeping it at home under their mattresses. The tenge depreciation signified their deposits had lost one-fifth of their value and their hard-currency loans had increased accordingly, making repayments far more costly. 

Hence, the devaluation sparked a series of protests in Almaty, the financial capital.  Although the number of protesters was relatively small, varying between 50 and 200 people, it was sizeable by Kazakhstan's standards. 

IMPLICATIONS: The National Bank of Kazakhstan is in charge of the country's monetary policy and was designed as an independent state body. In practice, the standing of the bank has greatly depended on the personality of its chairmen. In the 1990s, the National Bank was widely considered an independent entity with its own decision-making and ability to carefully weigh its opinions. Over time, this has changed, and with that also the level of trust that people have in this institution.

It was only five years ago that the outgoing Chairman Anvar Saidenov told the public there was no risk of devaluation, only for it to occur several weeks later under the incoming Chairman Grigori Marchenko.   

Kelimbetov, chairman since October, confounded people when he admitted in his first comments following the devaluation that he had learned about the policy change only the night before. This led to questions by protesters, analysts, and even members of parliament about his competence and integrity. If he is a puppet, then who made the decision? President Nazarbayev was notably absent from the country at the time of devaluation. 

But when he returned, he swung into action. Nazarbayev ordered the government on February 14 to use US$ 5.4 billion (1 trillion tenge) from the National Oil Fund to boost the economy in 2014 and 2015. How this will be done is not yet clear. He also told the National Bank to cut the share of non-performing loans in the banking sector in half by next year. These loans currently account for 31.4 percent of the banks' portfolios and are worth US$ 22.7 billion. They are to be reduced to 15 percent by 2015 and to 10 percent by 2016, which will be difficult to accomplish.

In addition, he ordered a 10 percent increase in salaries for state employees in education, science, health, culture, sports, and social protection starting April 1. Social assistance, study allowances, and pensions will go up as well. 

Nazarbayev also called on the large companies in the country to raise the salaries of their personnel, especially industrial workers, by 10 percent. The sovereign wealth fund Samruk-Kazyna, whose holdings include the national oil company Kazmunaigaz and state railway company Kazakhstan Temir Zholy, was instructed to boost salaries for workers by 10 percent starting April 1. 

Companies, such as ArcelorMittal Temirtau, the country's largest steelworks, and Eurasian Natural Resources Corp (ENRC) quickly said they would comply with Nazarbayev's request.

Yet, the jittery mood of the public was on full display several days later when rumors spread on WhatsApp on February 18 that three large Kazakh banks – Bank CenterCredit, Kaspi Bank, and Alliance – were allegedly on the verge of bankruptcy, triggering a run on the banks. Kelimbetov urged the people of Kazakhstan not to believe these rumors. Still, Kaspi Bank reported on February 20 that 10 percent of its deposits in all currencies had been drained. A former employee of Bank CenterCredit has since been detained for distributing misleading information.

CONCLUSIONS: The Kazakh tenge tends to shadow the movements of the Russian ruble. Kazakhstan's economy is similar to Russia's, albeit even less diversified. The February 2009 devaluation of the tenge followed a sharp drop in the value of the ruble.  This scenario repeated itself on February 11, 2014.

The beneficiaries of the devaluation are Kazakh companies in the extractive industries, such as the copper exporter Kazakhmys, whose earnings are paid in dollars and costs are mostly denominated in tenge. Following the news of the devaluation, Kazakhmys' shares rose by 17.7 percent on the London Stock Exchange. In Kazakhstan, exchange offices, shops, and grocery stores shut down. When they reopened, some food prices had gone up, others had not.

While the devaluation may have made economic sense for Kazakhstan's oil and mining exporters, the remaining trust in the National Bank and the state authorities has thoroughly been shaken. The devaluation could have taken place gradually, as it has in Russia. 

Finally, given the current structure of the economy, the National Bank and the government have few other tools at their disposal than devaluing the national currency to avoid stagnation. Any official assurances to the contrary should be taken with a grain of salt.

AUTHOR'S BIO: Birgit Brauer, Ph.D., is an analyst of Central Asian affairs. She was the Almaty-based Central Asia correspondent of The Economist from 1997 until 2012.

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