KAZAKHSTAN: MANY EXPERTS EXPECT A FURTHER DEVALUATION OF

UNCLAS SECTION 01 OF 02 ASTANA 000382

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TAGS: PGOV ECON EFIN EINV KZ
SUBJECT: KAZAKHSTAN: MANY EXPERTS EXPECT A FURTHER DEVALUATION OF
THE TENGE

REF: ASTANA 0218

ASTANA 00000382 001.2 OF 002



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


2. (SBU) SUMMARY: From February 17-20, Department of Treasury
Advisor Thomas Lanier held meetings in Astana and Almaty to assess
the Kazakhstani government's response to the global financial
crisis. There was significant discussion of the February 4
devaluation of the tenge. A number of Lanier's interlocutors said
they expected a further devaluation. National Bank Chairman
Grigoriy Marchenko said that the Bank will defend the currency at
its current exchange rate for now, while economic conditions will
determine whether a further devaluation will be necessary. END
SUMMARY.

THE DECISION TO DEVALUE


3. (U) On February 4, with the authorization of Prime Minister
Karim Masimov, newly-appointed National Bank Chairman Grigoriy
Marchenko announced that the Bank would no longer support the tenge
at its existing exchange rate of approximately 122 to the dollar,
and would allow the currency to depreciate to approximately 150
tenge to the dollar. Since then, the government has attempted to
reassure the public that no further devaluation is planned. The
government's official position is that it will defend the tenge at
the new rate, within a three percent band.


4. (SBU) John Litwak, the World Bank's chief economist in
Kazakhstan, told Lanier that by the end of January, the government
had spent more than $6 billion in reserves to defend its currency.
Then, on February 1, over $1.5 billion of reserves were lost in one
day as banks loaded up on dollars and abandoned the tenge. In
Litwack's opinion, imports must contract by 20 to 30 percent to
maintain the credibility of the current exchange rate -- which may
lead to higher tariffs or quotas.

MARKET ANTICIPATES ADDITIONAL DEVALUATION


5. (SBU) Not everyone is convinced that the government can
effectively defend the new exchange rate, however. Meder Amatov of
the European Bank for Reconstruction and Development (EBRD) told
Lanier that the February 4 devaluation was just the first stage of a
carefully strategized, three-stage devaluation process developed by
Marchenko and the National Bank. Assel Nusupova, Executive Director
of the Samruk-Kazyna National Welfare Fund, agreed and told Lanier
that Samruk-Kazyna expects another round of devaluation in the
future.


6. (SBU) Most bankers and analysts agreed that the move to devalue
the tenge was necessary, if not inevitable. Citibank Kazakhstan CEO
Daniel Connelly said to Lanier, "They held off as long as they
could, and did the right thing, which is probably enough for now."
In Connelly's opinion, the National Bank will likely be able to hold
this rate until June. He said that between now and then, the
government must ensure that Kazakhstani banks make several large
international payments. Further devaluation of the tenge before
June would make it harder for the banks to service their debts.
However, after these payments are made, Connelly expects the
National Bank to evaluate trends in the price of commodities,
notably crude oil, as well as the exchange rate of the Russian
ruble, to determine if a further devaluation would be appropriate.

MARCHENKO'S TOP THREE PRIORITIES


7. (SBU) Marchenko himself told Lanier, "In my opinion, (the
devaluation) should have happened in October. But we waited, and
rather than a gradual devaluation, we had no choice (but to have a
sharp devaluation)." He explained that the National Bank now faces
three major issues: maintaining the "health" of the Bank,
distributing money efficiently from the National (Oil) Fund, and
deciding when and how to devalue the currency, if local banks cannot

ASTANA 00000382 002.2 OF 002


weather the economic downturn. Marchenko said the government's
decision to acquire BTA and Alliance Bank was driven by stress tests
conducted by the Financial Supervision Agency (FSA) indicating that
neither BTA nor Alliance Bank could withstand a 15% devaluation of
the tenge (see septel).

CURRENCY RESERVES "WILL LAST 18-24 MONTHS"


8. (SBU) Marchenko stands by his public statements to defend the
currency. "If you announce an exchange rate, you should protect it"
he said. Downplaying the devaluation, he pointed out that the tenge
has simply returned to its 2001-2003 levels. Marchenko acknowledged
that the global financial crisis will be a "real test" for the
Kazakhstani economy, but said he remains optimistic over the
long-term, given the country's vast natural resources. However, he
said, the next several years will very difficult. "Many people were
initially against the creation of the National Fund, but it has
proven its worth. At this rate, our reserves will last us 18-24
months." Despite the obvious challenges, Marchenko appeared
confident, even happy, in his new position, seemingly delighted to
once again be at the helm of Kazakhstan's economy.


9. (SBU) Despite critics in Kazakhstan who have seen a decline in
their purchasing power and an immediate spike in inflation as a
result of the devaluation, Marchenko remains popular. "The National
Bank is taking appropriate action to stabilize the market and
bringing in Marchenko is a good sign," said Citibank's Connelly.
ABN Amro Chairman Rudi Geerdink agreed, saying, "You have to give
Marchenko credit for taking firm control of the situation. He is
what we need now in a crisis and I support him."


10. (SBU) COMMENT: Although it is impossible to say when, or if,
the government will again devalue the currency, it is clear that
this is an extremely sensitive subject among Kazakhstan's political
elite. In the past week alone, President Nazarbayev himself has
made two public statements denying rumors of plans to devalue the
tenge further, and Prime Minister Masimov and National Bank Chairman
Marchenko have each denied rumors that they profited personally from
the April devaluation. The next three months may prove critical to
the stability of the currency, since the country's largest banks
must repay billions of dollars to foreign creditors. END COMMENT.

HOAGLAND