Kazakhstan: The Falling Tenge

Kazakhstan's central bank devalued the tenge by 22 percent on Feb. 4, plunging its rate from 122.3 to 149.5 tenge per U.S. dollar and ending a long (and expensive) effort to keep the currency at roughly 120 per U.S. dollar. The new trading band of the tenge to the U.S. dollar will be 145-155. The central bank chairman, Grigory Marchenko, said that "a new market equilibrium level" has been reached and that the central bank would now maintain it. The devaluation came one day following the nationalization of BTA Bank and Alliance Bank, Kazakhstan's largest and fourth-largest banks, respectively. While the decline in the tenge will severely affect Kazakh banks' ability to repay their foreign debts, it will not have any significant impact on the country's energy sector, which receives profits purely in dollars (the sector may even profit as their domestic business costs — such as salaries or rent — go down with the domestic currency). The oil sector is generally safe from the domestic crisis, although expansion and the development of new projects will stall due to the global recession. Furthermore, the timing of the devaluation — immediately following bank nationalizations — signals that Astana is serious about remaining a business partner with the West because it is not going to simply allow banks to default on loans made with foreign banks (unlike Iceland, for example, which defaulted on the foreign loans its banks held after it nationalized them). Astana does not want to burn any bridges — at least not right now. Kazakhstan's economy depends on oil for more than 70 percent of its export revenue and more than 76 percent of all foreign direct investment in the country. Thus, the economy has suffered since oil prices fell from their high in mid-2008 to under $50 per barrel. Furthermore, Kazakh banks expanded during the post-2002 global credit orgy that is much to blame for the world's current economic problems. This was quite possibly the absolute worst time to learn how to conduct modern banking on the fly, because with the credit so cheap and plentiful, prudence was not the word of the day. Kazakhstan now has one of the highest rates of privately-held foreign debt — US$103 billion, which equaled 100 percent of the country's gross domestic product (GDP) in 2007 (compared to 35 percent for Russia). The banks hold around US$40 billion of that debt, of which US$19 billion will be due in 2009. The tenge devaluation was largely expected because of the Kazakh economy's intimate links to the Russian economy. With the ruble depreciating more than 35 percent against the dollar since August 2008, Kazakh exports to Russia — which account for over a third of all Kazakh exports — were becoming increasingly uncompetitive on the Russian market. The value of remittances sent by Kazakh migrants to Russia, accounting for roughly 6 percent of Kazakh GDP, also depreciated with the ruble's fall and the tenge's stability. Kazakhstan's central bank also decided that defending the tenge to preserve banks' ability to repay their foreign debt was no longer tenable due to the strain on its foreign reserves and reserve funds. Kazakhstan has built up a hefty oil-funded treasure chest over the last two years due to high oil prices. Modeled after the Norwegian Oil Fund, Kazakhstan's National Fund had as of December 2008 US$27.33 billion — a number soon to be depleted through various bank nationalizations and rescues (valued at approximately US$4 billion) and the US$21 billion stimulus plan announced in late October 2008 that will start taking effect in 2009. The country's foreign reserves — estimated at US$17.5 billion since the end of January — have also been expended by attempts to prop up the tenge, with US$1.6 billion spent in January alone. The timing of the devaluation is revealing. Kazakhstan's central bank waited until BTA Bank and Alliance Bank were nationalized before dropping the hammer on the tenge. This would make sense in most countries, since the government understood that the banks would collapse under the burden of a suddenly greater foreign debt. But Kazakhstan could have ignored the foreign creditors and dropped the tenge precisely to force the banks to default and scoop up their empty carcasses afterwards. That Astana chose to take on the debt repayment responsibilities itself illustrates that Kazakhstan wants to maintain its access to foreign lines of credit in the future and that it does not want to become a financial pariah. However, Kazakhstan also believes that it has the upper hand with the West, because with Europe's stated desire to diversify its energy sources away from Russia, Astana feels it will be well-positioned to negotiate down the loans it takes on as it nationalizes the banks.