Thursday, August 20, 2015

Devaluation of Kazakh Tenge (KZT) - is it time to worry?

If you do not have much time to read my blog but do want to know the answer of my question above, then, it is big NO. However, I would want you to read the whole blogpost and appreciate my arguments in a logical manner.

First of all, the big story of the day: Kazakh Government and the Central Bank of Kazakhstan has decided on August 20, 2015 that it will no longer determine the value of Kazakhstan Currency Tenge (KZT or Tenge) with respect to US Dollar. The government has clarified that the markets will determine the exchange rate and the government will intervene only when the situation becomes extreme worse. 

That means the earlier process of maintaining currency band by National Banks has been done away with and free floating exchange rate will determine the value of #tenge. This is going one step ahead on embracing of free private markets in Kazakhstan and it will be a good move in the long run.

Sentiments in Astana: On August 19, I got a call from my friend saying that #Tenge has devalued by more than 5% and currently trading at more than 195. That made me curious to check the markets as it used to normally trade around 185-187 in Astana. The friend also talked of possible sliding of #tenge in the future (to around 200 #tenge) based on people's discussion in the office. We talked shortly on the impact of such devaluation and I expressed that sliding of currency is nothing much to worry for the commoners.

I have no job currently and I get up late. But, before getting up, I scroll twitter Timeline for half an hour to get the stock of news from around the world, mostly from my home country-India. The tracking of currency market is one of my interests and #Indian currency is also on my radar. Indian currency has devalued by more than 15% in the past two years. After devaluation of Chinese Currency, it has come under more heat. However, India has fair share of exports in the world and there is not much complain about such sliding of Indian Currency. Also, Indian currency market is completely liberalised and based on free currency markets, any appreciation and depreciation of currency is at best left to market forces. Why I bring the example of India here is that I am no stranger to such fluctuation of currency markets. But, today was a different day. 

When I was scrolling the twitter in the morning, I saw a Financial Times News which said loudly that the government has abandoned the prescription of currency exchange band and has allowed the market to determine its price and the #tenge is currently trading at 255 per Dollar. That was quite an unexpected as my "uneducated" and limited knowledge told me that it would hover around 200-210 as I was not expecting doing away of exchange band.

My Reaction after the News:

I have travelled Kazakhstan many times and everytime I come here, I find different exchange rate where #tenge gets depreciated regularly. It is quite regular and normal in emerging developing economy. I remember exchanging my money for 150 KZT per Dollar. Then, I was aware of the long queue of people in front of banks and ATMs to withdraw #tenge and convert it to USD when government devalued #Tenge in 2014 from 150 to 180 KZT. I was interested to see the people's reaction today and went to "Respublica Street" in Astana where there are many money exchange counters. There were sizeable people in front of every money exchange counters, banks. There were few short queues. TV Cameras could be seen. 

I do not know what people were thinking when they could buy some USD but I see it (an attempt to stock USD) as a big problem mostly due to lack of knowledge on the subject regarding impact of Currency markets.

Few photos from #Astana where money exchange counters and banks are displaying different rates:

People looking at Currency Exchange Rate Board for Kazakh Tenge at Respublica Street in Astana

Kazakhstan #Tenge Exchange Rate against USD on 20 August, 2015 in Astana, Kazakhstan

Kazakh Currency Exchange rate display in Astana

Now, let us delve into the subject matter. What happened to Kazakh Currency #Tenge? Is it depreciation of currency or devaluation? What will be the impacts? impacts on common man, tourists, foreigners, local companies, on exports and on imports? Is it good or bad?

Let's take the issue one by one.

What happened to the Kazakh Currency today is what exactly happened to Indian currency in 1991 AD. Before 1991 AD, Indian currency exchange rate was controlled by government and was pegged with major currency baskets. However, India's foreign currency reserves were depleting as market was not favourable for investment due to low and controlled exchange rates. India realised that there is a path of success only when the market is liberalised. And Indian currency market was liberalised which opened a new era of "economic liberalisation". Compare the situation of India in 1991 when it had foreign currency reserves of 2 billion USD and today (in May, 2015), it has a currency reserves of 353 billion USD.

So, what happened today to Kazakhstan #tenge is neither depreciation nor devaluation. It is making #tenge free from the clutch of government regulation/control. It is making currency free to be evaluated by market and based on the demands of the market, the value of the currency will be determined in the coming days. Since #tenge will have exchange rate determined by market, there will be slight change of value everyday and depending on other factors like industrial outputs, demand of exports, investment possibilities and reforms, tenge will shed some value or will gain some.

Let us also think of why #tenge lost so much of value in a single day??

It is simply because the currency was overvalued, #tenge was over-priced. There was too much pressure from government to support #tenge and today, when it became free, #tenge is trying to find its price. It is going to find its stable position, looking for stability. That is the reason why tenge fell by 70 tenge in a day. That is 30% fall in a single day. It tells us #Kazakhstan economy is not that strong at the moment to support #tenge at a current exchange rate. That tells us foreigners (foreign business councils/business enterprises) do not value #Kazakhstan so much at the moment. There may be fluctuation of #tenge in another few days as market is looking for correction and right balance but there WILL NOT be any big free fall or free rise on coming days. Unless Industrial outputs data are too grim on coming days, #tenge should stabilize around 255-265 per USD. Any other rumours, at the moment, is difficult to back.

Now, let us talk about the impacts of this depreciation/devaluation of tenge: This is the most important issues for people residing in Kazakhstan. What is going to happen next? What should they do or what should not they do?

I am using the word "depreciation/devaluation" only to mean that #tenge has lost value against Dollar. So, first of all, let us understand the general impacts of currency depreciation/devaluation:

Since #Tenge has devalued in this process of making it free from government control, devaluation leads to a decline in the value of a currency. That will make exports more competitive and imports more expensive. Think of a simple example, if a Kazakh Citizen exports a bread of 1 USD to its neighbour, it could earn 185 KZT yesterday but today, the same Kazakh Citizen will be earning 255 KZT. Therefore, devaluation of currency will have positive impacts on the exports. It will boost exports.

But, it will have also a negative impacts if it is heavily dependent on imports. In the same example given above, if the Kazakh citizen is importing bread for 1 USD, he could arrange 1 USD by only paying 185 KZT yesterday but today, he will have to pay 255 KZT. This will hurt imports.

This is a basic and straight economics and it equally applies to Kazakhstan. To make the most out of it, Kazakhstan should think of more exports and less of imports. Kazakhstan should think of diversifying of its economy to make most from the exports opportunities and should invest more on the local production to reduce the imports. However, this is for the long term. It will also bring the positive impacts to the balance of payment issues and to the foreign currency reserves.

One positive impact of leaving exchange rate determination to markets is that it will attract the capital inflow/investment in the country and it will have positive effect on the value of the nation's currency and foreign currency reserves. This will apply both in the short term and in the long term.

Let's think of the short term and current issues

IN the short term, this devaluation of #tenge will have some visible impacts on the economy. The following I can think of:

1. Since there can not be sudden increase of exports and imports can not be reduced overnights, the prices of the goods may go up. This may result in inflation. However, you must understand that devaluation will not direct impact on inflation as inflation is caused by over circulation of money thereby money losing its purchasing power. One more thing also to be understood is that government can take inflation controlling measures to offset the effect of current devaluation. We need to wait for the future to understand the real impacts.

2. The people who have taken loan on USD will be the highest impacts as each USD is going to cost extra 70 tenge in average. The sectors that will be affected as per my limited knowledge of Kazakhstan is the realty (real estate). The effects will be of two fold. One the developer of housing apartment will want to sell the houses on high prices to pay their loans and interests which they have taken on USD. If salary or earnings is constant, people will have to depend more on loan to buy houses and banks will be able to charge more with increase in interest rates of house loans. However, we must wait and see how National Bank will intervene on this as they have to balance between the liquidity of funds and inflation. This issue needs a close observation in the future.

What is going to happen next? What should they (people residing in Kazakhstan) do or what shouldn't they/we do?

Most importantly, should we run towards the money exchange counters/banks to sell our Tenge and buy USD and keep stocks of USD?

I think Kazakhstan is too liberal to allow people to buy/sell foreign currencies. It is too liberal to grant loans on USD. That's why though Kazakhstan people are very patriotic and in love with their county, I have not seen the same love when it comes to Kazakhstan Tenge. (In my next post, I will have a piece of advice to Kazakhstan Government on how it can tighten the rule.) The liberalisation of Kazakh Government has given people too much options and worry when it comes to the issues of deciding Kazakh Tenge vs US Dollar. Unless you are planning to permanently settle down in foreign countries or unless you are thinking of investing in foreign companies, do not show "herd mentality" (I am sorry to use this phrase!) by rushing to buy USD. If you have to live in this country and buy milk, bread butter in Kazakh Shops, there is nothing you are gaining by keeping USD with you.

If you are patriotic Kazakh and want to see stable Kazakh Currency, you should show more trust in #tenge and do transactions in #KZT #tenge. If you are running to buy more USD and keep stock of it, that means there is a secret desire inside you that #KZT #tenge should fall after some day and you should book some profits. If this is a desire of yours, you are only wishing for a vicious circle of currency destabilisation and it is going to hurt everyone.

So, keep calm. Hold your Kazakh tenge with you and watch out the movement of markets. We have come a long way from the Soviet collapse and similar situation again in energy rich Kazakhstan is absolutely impossible. Though Kazakhstan needs to see other areas of economy diversification, i.e. other business ideas for exports.

That is all for the day! I will write more on economic and monetary issues of Kazakhstan. Do watch this space and be Optimist!!

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