KAZAKHSTAN: GOVERNMENT DEVALUES TENGE

UNCLAS SECTION 01 OF 02 ASTANA 000218

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB/IFD/OMA, EEB/EPPD
STATE PLEASE PASS TO USTDA FOR DAN STEIN AND USTR

E.O. 12958: N/A
TAGS: PGOV ECON EFIN EINV ELAB KZ
SUBJECT: KAZAKHSTAN: GOVERNMENT DEVALUES TENGE

REF: ASTANA 204

ASTANA 00000218 001.2 OF 002



1. (U) Sensitive but unclassified. Not for public Internet
distribution.


2. (U) SUMMARY: The National Bank of Kazakhstan allowed the
country's currency, the tenge (KZT),to devalue on February 4 from
its exchange rate of approximately 122 to the dollar. Announcing
that it would abandon its support of the tenge in a bid to conserve
foreign exchange reserves and increase domestic competitiveness, the
National Bank set a new target rate of 150 tenge to the dollar.
The move to quickly and significantly devalue was attributed to new
National Bank Chairman Grigoriy Marchenko. The devaluation set off
a rush among the public to buy dollars, resulting in dollar
shortages at banks and exchange points. Stores moved to quickly
adjust tenge prices upward. Twelve-month futures contracts for
tenge were trading at 186 tenge to the dollar on February 5, but
Marchenko said publicly the National Bank would not allow the tenge
to slide to that level. END SUMMARY.

DECISIVE MOVE TO DEVALUE ATTRIBUTED TO NEW NATIONAL BANK HEAD


3. (U) Kazakhstan's National Bank announced on February 4 that it
would stop supporting the country's national currency, the tenge
(KZT),at its current exchange rate of approximately 122 per dollar,
and allow it to devalue to the range of 145-155 per dollar. The
announcement caused a rush among the public to exchange tenge for
dollars, leading to dollar shortages at banks and currency exchange
booths. The tenge immediately dropped toward 150 per dollar, with
"street rates" reportedly approaching 200 tenge to the dollar in
some provincial towns.


4. (SBU) A devaluation had been widely expected -- but not so steep,
and perhaps not so soon. As late as February 2, Minister of Economy
and Budget Planning Bakhyt Sultanov assured the public that a tenge
devaluation would not exceed 10 percent. Prime Minister Masimov
told the Ambassador on February 3 that the government had a
"confiden tial plan" to devalue, but gave no hint that it would be
implemented the following day.


5. (U) Analysts attribute the decisive move to devalue to
newly-appointed National Bank chairman Grigoriy Marchenko, a
widely-respected economist and banker who was most recently CEO of
Halyk Bank and previously headed the National Bank following the
1998 Russian financial crisis. The National Bank reportedly spent
more than $6 billion from its foreign currency reserves over the
past four months defending the tenge, including $2.7 billion in
January alone. (NOTE: Prior to the February 4 devaluation, the
tenge had effectively been pegged at a rate of 120 tenge to the
dollar since September 2007, never moving more than three percent
above or below that level. END NOTE.) The move to devaluate was
taken in part to improve Kazakhstan's terms of trade, particularly
in light of the recent devaluation of the Russian ruble. Russia is
Kazakhstan's largest trading partner, and with a 40 percent
devaluation of the ruble since the summer of 2008, Kazakhstani
enterprises were being placed at a growing economic disadvantage
relative to their Russian competitors.

NATIONAL BANK PLEDGES TO MAINTAIN NEW BAND


6. (SBU) The National Bank has pledged it will maintain the
currency within a new band of 145-155 tenge to the dollar.
Marchenko said that the government and National Bank will provide
assistance to help banks withstand the potential negative effects of
the devaluation. Samruk-Kazyna National Welfare Fund Chairman
Kairat Kelimbetov urged the population to remain calm and pledged
that inflation, at least for daily necessities, will be kept
manageable. Despite his reassurances, on February 5, many shops in
Almaty and Astana closed to adjust tenge prices upward. Some
Embassy suppliers are threatening to break their contracts and are
demanding higher prices for their services in response to the
devaluation. Even the Intercontinental Hotel in Almaty raised rates

ASTANA 00000218 002.2 OF 002


by 25 percent literally overnight -- slipping a revised bill under
the Ambassador's door while he was asleep in his hotel room.


7. (SBU) It remains unclear whether the National Bank will be able
to hold the tenge within the new 145-155 band. On February 5,
twelve-month forward contracts used to speculate on or hedge against
future currency fluctuations were trading at 186 tenge to the
dollar. "The pressure will be there at 150 for the tenge and
they'll have to devalue again," Lars Christensen, head of
emerging-market strategy at Danske Bank in Copenhagen told
Bloomberg. "As long as oil prices remain subdued, there is nothing
telling you to buy the tenge and there will be pressure there," he
argued. However, National Bank Chairman Marchenko dismissed this
speculation on February 5, saying "We will hold to the announced
corridor. Talk that the exchange rate will be 180 tenge per dollar
in two months and 300 tenge at the end of this year is not truth,
but fantasy."


8. (SBU) COMMENT: It remains to be seen how this devaluation will
affect the ability to Kazakhstani banks to make repayments on their
foreign debt obligations, which are usually denominated in dollars.
Kazakhstani banks owe approximately $40 billion to external lenders,
of which more than $10 billion is due to be repaid in 2009 and
another $10 billion in 2010. END COMMENT.

HOAGLAND