Sunday, August 23, 2015

Challenges for the Kazakhstan Economy and to the Kazakh Tenge

You can read this article in Chicago Tribune which summarizes the current economic situation in Kazakhstan. On the light of yesterday's (20 August, 2015) decision of Kazakhstan Government and National Bank of Kazakhstan not to intervene in the exchange rate determination, the Kazakh currency #tenge has fallen by 30% to 255 KZT/Dollar. Since the Kazakhstan has adopted completely free market model and has opted for free floating exchange model, any further appreciation or depreciation of #tenge will depend mostly on the economic conditions of the country. On 21 August, 2015, #Tenge was seen selling in Astana for 237 KZT/USD and thereby has recovered by small margin.

Let us think of what are the factors that have bearing on rate of #tenge in the future:

1. Probability of earning of foreign currency: Kazakhstan's biggest export is natural oil & gases. Kazakhstan earns maximum foreign currency by exporting oils to different countries like to Russia and Ukraine. Unfortunately, the prices of oil is falling and therefore, it will hurt the foreign currency reserves of Kazakhstan. The less amount of USD the country has, the more price we/business have to pay for each Forex thereby evaluating Forex better than national currency. As the market experts are telling us that the price of oil may be around 30-40 USD per barrel in near future, the President of Kazakhstan is absolutely right to tell that economic planning should be done on the basis of "new economic realities". The news reports also told us that the exports of #Kazakhstan has slumped by 75% in first half of 2015. This is not a good sign and will play a role to depreciate #Tenge further.

2. Diversification of Exports: I have already stated above that the main exports of Kazakhstan is oil & gas. This is the time Kazakhstan should desperately look for new targets of exports. New goods should be produced, and new markets should be discovered. Therefore, there needs to be revolution in manufacturing, and agricultural exports. Kazakhstan should start thinking if they can manufacture cars, machineries, sports equipments, electronic gadgets and the list will go on and exports them. This is not a task that anyone can do overnight. Expo-2017 in Astana should be aligned with this objective.

3. Introduction/Entry of Eurasian Economic Union and in WTO: The entry to the WTO is too early to talk about.

Let us focus on Eurasian Economic Union (EEU). It has created a free market for all the trading partners. This is good for the champions of free market enterprises. However, it will create a price wars. Ultimately, consumers will benefit but it can also dent economy. There is a talk that goods manufactured in Russia are cheaper and are entering to Kazakhstan. This has hurt the local Kazakh industries as their goods are not competitive in domestic markets and for the exports.

There is a no easy solution for this except that the Kazakh Companies should work on cost reduction and making their products competitive. Unless the domestic markets (at least domestic markets) are made self reliant, the flight of currency continues and it will hurt the country in the long run. Kazakhstan Government will have a role here to create exports oriented units, special economic zones and various exemptions can be granted something like imports duty exemption on Capital Expenditure (on imports of machinery, plants etc.), no income tax for first 10 years of production etc. Foreign companies should be lured to invest in Kazakhstan and export their products.

4. Economic Conditions of trading partners: The problem explained above at No. 3 will get further aggravated by the economic conditions of trading partners. The important trading partners of Kazakhstan are Russia and China and both are showing sign of slowing down. Russia is caught in the problems partially created by itself and to some extent, fueled by the West. The Russia-Ukraine conflict has created the mess in Russian economy and its currency Ruble is sliding. Also, China did not want to lag much behind when its data of exports were not great and intervened to devalue its currency Yuan to give boost to the exports.

Naturally, once the Russian and Chinese currencies are devalued, exports from these two countries to Kazakhstan has gone up putting enormous pressure on Kazakh #tenge (In terms of exact data, the effect after Yuan devaluation is yet to be seen.My arguments are based on presumption for the future.). To absorb such pressure, Government of Kazakhstan did not have any other options than devaluing of #tenge. At this time, #Kazakhstan has gone one step ahead and has not only allowed #tenge to devalue, it has left the #tenge at the mercy of markets. This is a good and positive step and #tenge will find its own sustainable rate in the future based on economic data.

The Article in Chicago Tribune also states the current condition as follows:

The ruble's slide led Kazakhstan to witness an influx of grain, metals, construction materials, oil products and coal from its northern neighbor, according to Kazakh business association Atameken.  

By the current depreciation of #tenge, this problem should be addressed to some extent.

The more on the #Kazakhstan's economy and the course that is likely to be taken by #tenge will be on my next blogpost.

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