Macro Implications Of Tenge Devaluation

The National Bank of Kazakhstan (NBK) announced unexpectedly on February 11 that it would allow a significant devaluation of the Kazakh tenge against the US dollar, which saw the currency plummet from KZT155.56/US$ on February 10 to KZT185.87/US$ at the time of writing. The NBK cited weakness of the Russian rouble, a narrowing current account surplus and capital fight as reasons for the devaluation, which took consensus and markets by surprise (unlike the devaluation back in 2009 the 12-month non-deliverable forward contract for the tenge showed little sign of an impending devaluation), and since they have a healthy reserve buffer we believe the unit is likely to stabilise around current levels over the short term.

However, the longer-term trajectory is harder to call at this stage, as it will largely depend on the extent to which the authorities are willing to implement reforms to boost domestic productivity, with the devaluation likely to only have a short-term impact on export competitiveness. Nevertheless, we do see several key immediate macro implications of the devaluation.

Macro Implications

Surprise Move
Kazakhstan - KZT/US$, Exchange Rate

The National Bank of Kazakhstan (NBK) announced unexpectedly on February 11 that it would allow a significant devaluation of the Kazakh tenge against the US dollar, which saw the currency plummet from KZT155.56/US$ on February 10 to KZT185.87/US$ at the time of writing. The NBK cited weakness of the Russian rouble, a narrowing current account surplus and capital fight as reasons for the devaluation, which took consensus and markets by surprise (unlike the devaluation back in 2009 the 12-month non-deliverable forward contract for the tenge showed little sign of an impending devaluation), and since they have a healthy reserve buffer we believe the unit is likely to stabilise around current levels over the short term.

Surprise Move
Kazakhstan - KZT/US$, Exchange Rate

However, the longer-term trajectory is harder to call at this stage, as it will largely depend on the extent to which the authorities are willing to implement reforms to boost domestic productivity, with the devaluation likely to only have a short-term impact on export competitiveness. Nevertheless, we do see several key immediate macro implications of the devaluation.

Macro Implications

Trade: Kazakhstan's net export outlook will undoubtedly receive a boost from the weaker tenge. The Kazkah current account surplus has narrowed from 6.6% of GDP in 2011 to 4.3% of GDP in 2013 according to Bloomberg estimates. The trend has largely been as a result of rising imports, fuelled by increasing household consumption. The devaluation of the tenge will increase the costs of imported goods significantly, suppressing demand and assisting in widening Kazakhstan's trade surplus. This is in combination with our expectations for a small boost to export levels, and will assist in widening the current account surplus in 2014 and 2015. We have been, and are set to remain, above consensus with our forecast for Kazakhstan's current account surplus.

Previous Devaluation Engenders Surplus
Kazakhstan - Trade Balance 6mma, US$ and Exports 3mma, % chg y-o-y

Economic Activity: While the devaluation will provide a boost to net exports, it is set to drag on the key driver of Kazakh economic activity: private consumption. The devaluation of the tenge will significantly reduce household purchasing power, as imported goods prices rise, that in turn will hurt household expenditure. The depressed outlook for the consumer bolsters our below-consensus forecasts for Kazakh real GDP growth in 2014 and 2015.

Inflation: The spike that the tenge devaluation will cause in imported goods prices will undoubtedly lead to a ramp up in consumer price inflation. We are currently forecasting consumer price inflation to rise to 5.5% year-on-year (y-o-y) by end-2014, from 4.8% y-o-y in December 2013, although these projections will be revised up in the coming days.

Fiscal: The Kazakh government's fiscal accounts will receive a boost from the devaluation, as FX flows from oil exports translate into larger quantities of tenge revenues for the state. This bolsters our above consensus forecast for Kazakhstan's budget balance, with our projections for a surplus of 4.8% of GDP in 2014, compared to consensus estimates of a 2.4% of GDP budget deficit.

We will continue to monitor the level of the Russian rouble, due to its influence on Kazakh central bank policy direction, although we remain relatively bearish on the currency over the long term. This will ensure that depreciatory pressures remain prevalent on the tenge, although we believe FX reserves would prove sufficient to limit another sharp devaluation.

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