The drivers of recent tenge exchange rate fluctuations
Introduction
What policies and factors swung the tenge exchange rate this month? Will the pendulum substantially sway in the depreciation direction again?
The depreciation
On September 12, the official tenge exchange rate reached 380.93 KZT per dollar, approaching the historical record of 383.91 as of January 22, 2016. The tenge had tended to depreciate since May. After September 12, the exchange rate bounced back. The official rate decreased to 352.54 KZT per dollar by September 22, and began to weaken again afterwards.
Many analysts have linked the tenge weakening to that of the Russian rouble. Russia has been the largest importer of goods into Kazakhstan, accounting for 37.6% of the country’s imports as of December 2017, reports Kazdata. Hence, the rouble depreciation has had the most significant impact. Other countries that tightened their monetary policy, such as Turkey (which accounted for only 2% of Kazakhstan’s imports in December 2017), were less important.
During the first half of August, the Russian rouble depreciated from reduced investor confidence. The exchange rate weakened from 62.34 roubles per U.S. Dollar on August 8 to 68.22 roubles per dollar on August 14, according to the Central Bank of Russia website. On June 1, the exchange rate was 62.01 roubles per dollar, implying a 10% depreciation. Under the existing floating exchange rate system, more tenge was needed to buy cheaper rouble-denominated goods. When money supply grows, the national currency depreciates and inflation accelerates.
On September 14, the Central Bank of Russia held a Board of Directors meeting. The Bank increased the key interest rate, the minimum rate on one-week loans to second-tier banks and the maximum rate, at which it accepts their deposits, from 7.25% to 7.5%. The Central Bank also instructed the Russian Ministry of Finance to pause foreign currency purchases until December (previously, the pause was planned until September.) Immediately after these policies were announced, the rouble appreciated from 68.40 to 67.60 per dollar, reports RBC.ru. A stronger rouble stirred expectations of tenge strengthening. A few days later, the National Bank of Kazakhstan responded with tight money policy measures of its own.
Monetary policy
Since May 2016, the National Bank’s base interest rate has been decreasing. The Bank argued that low inflationary expectations justify low interest rates. On May 5, the National Bank reduced the base rate by 0.25%. The Bank kept it constant since then, as Table 1 shows. (In Kazakhstan, the base rate is the rate that the National Bank uses to regulate rates on interbank loans on the money market. Starting from April 1, 2017, the official refinancing rate - the rate at which the National Bank provides last-resort loans to second-tier banks - is equal to the base rate. When it decreases, borrowing becomes cheaper, leading to a higher money supply.) Henceforth, the average nominal interest rate on tenge loans decreased from 13.2% at the end of December 2017 to 12.4% at the end of July 2017 for loans to non-banking legal entities and from 19.2% to 18.4% for loans to individuals, reports the National Bank website.
Decision on the Base Rate (Effective Since)
|
Rates, %
|
Corridor, %
|
16.01.2018
|
9.75
|
8.75 - 10.75
|
06.03.2018
|
9.5
|
8.5 - 10.5
|
17.04.2018
|
9.25
|
8.25 - 10.25
|
05.06.2018
|
9.00
|
8.00 - 10.00
|
10.07.2018
|
9.00
|
8.00 - 10.00
|
04.09.2018
|
9.00
|
8.00 - 10.00
|
Table 1: Dynamics of the Base Interest Rate of the NBK (2018)
Month
|
Short-term notes in circulation, mln. KZT
|
12.17
|
3 183 439
|
01.18
|
3 957 073
|
02.18
|
4 001 879
|
03.18
|
4 186 403
|
04.18
|
4 171 615
|
05.18
|
4 015 625
|
06.18
|
3 648 269
|
07.18
|
3 329 634
|
08.18
|
3 256 685
|
Table 2: The volume of shortterm notes of the National Bank of Kazakhstan in circulation for the end of month (December 2017 - August 2018)
Open market operations have many advantages. Compared to discount policy (adjusting the refinancing rate for Kazakhstan), open market operations are more flexible and easily reversible. The central bank has full control over these operations. In discount policy, it is the second-tier banks that make the borrowing decisions. Hence, unexpected fluctuations in the money supply may occur. Furthermore, decreasing rates in discount policy increases the moral hazard problem, and increasing them makes last resort borrowing more expensive. As for notes, when they mature, new sales may be needed to keep the money supply low.
Oil revenues and the exchange rate
Oil prices have tended to rise since January 2016. Over the last 52 weeks (from September 26, 2017 till September 26, 2018), Brent crude oil prices increased 50.7%, according to Bloomberg. The Venezuelan economic turmoil (where real GDP is expected to plummet 15% and inflation expected to exceed 12,000% this year) and renewed sanctions on Iran decrease oil supply. Economic growth in the United States (forecasted at 2.93% for the year, according to the IMF) increases oil demand. When oil prices rise, exporters have more dollars, pressing the tenge to strengthen. Without monetary measures, these pressures did not suffice to strengthen the tenge, but may suffice in the future.
The trend of increasing oil revenues may or may not persist. Energy expert John Kilduff believes that West Texas Intermediate (WTI) oil prices may increase by as much as 30% by winter, primarily due to Iran sanctions, reports Stephanie Landsman, of CNBC. However, President Trump is playing with fire by fighting a trade war with China and the EU. According to IMF Managing Director Christine Lagarde, existing trade restrictions between these economies may decrease global output by 0.5% from initial projections for 2020, which is about the equivalent of the size of Thailand’s economy, reports David Lawder, of Reuters UK. If oil demand and prices plummet as a result, there will be pressures on the tenge to weaken.
Conclusion
Notes
On August 9, the U.S. State Department announced new sanctions against Russia, effective since August 22. The first package bans exports, relating to security, into Russia, particularly electronics equipment and its components. The second package, effective in 90 days afterwards, prohibits flights by Aeroflot, Russia’s largest airline to the United States, bans most trade between the two countries, and weakens diplomatic relations, reports Sofia Melnichuk, of Lenta.ru.
References
International Monetary Fund. World Economic Outlook Database. https://www.imf.org/external/pubs/ft/weo/2018/01/weodata/index.aspx. 2018.
Kazdata. Imports and exports of Kazakhstan in 2017. https://kazdata.kz/04/all-import-eksport-kazakhstan-2017.html. 2017.
Landsman, S. Oil could surge into the mid-$90s within months, creating $4 per gallon gas: Energy expert John Kilduff. https://www.cnbc.com/2018/08/31/oil-prices-could-surge-35percent-into-mid-90s-within-months-john-kilduff.html. CNBC. 2018.
Lawder, D. IMF warns of growing damage from trade fight, says U.S. vulnerable. Reuters UK. https://uk.reuters.com/article/uk-imf-outlook/imf-warns-u-s-vulnerable-in-escalating-trade-fight-idUKKBN1K61SO. 2018.
Melnichuk, S. The United States will impose new sanctions on Russia. https://lenta.ru/brief/2018/08/09/new_sacntions_incoming/. 2018.
National Bank of the Republic of Kazakhstan. Press release # 14: The base rate reduced to 9%. http://www.nationalbank.kz/cont/ПР%20базовая%20ставка_англ.pdf. 2018.
National Bank of the Republic of Kazakhstan. Statistics. http://www.nationalbank.kz/?docid=158&switch=english. 2018.
RBC.ru. The Bank of Russia increased the key interest rate for the first time since 2014. https://www.rbc.ru/finances/14/09/2018/5b9b737d9a7947be2dbb7b81. 2018.
Tengri News. The National Bank withdrew 250 billion KZT from the market - experts talk about the national currency appreciation. https://tengrinews.kz/money/natsbank-izyyal-ryinka-250-milliardov-tenge-ekspertyi-354077/. 2018.
