KAZAKHSTAN: NEW CURRENCY CORRIDOR FOR THE TENGE

UNCLAS SECTION 01 OF 02 ASTANA 000163 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB/IFD/OMA STATE PLEASE PASS TO USTDA, USTR, AND OPIC E.O. 12958: N/A TAGS: PGOV PREL ECON EFIN KZ SUBJECT: KAZAKHSTAN: NEW CURRENCY CORRIDOR FOR THE TENGE ASTANA 00000163 001.3 OF 002 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (U) SUMMARY: The National Bank of Kazakhstan introduced a new currency corridor on February 5. On average, the exchange rate of the tenge will remain at 150 tenge to the dollar. However, the National Bank said the tenge will now be allowed to float between 127.5 and 165 to the dollar (plus 10% and minus 15%),in order to increase exchange rate flexibility. The new currency corridor will remain in effect until March 2011. Analysts said that destabilization of the currency exchange market in Kazakhstan is very unlikely. END SUMMARY. KAZAKHSTAN WEATHERS ECONOMIC CRISIS BETTER THAN OTHERS ¶3. (U) February 4 was the one-year anniversary of the National Bank of Kazakhstan's (NBK) devaluation of the tenge in 2009, when the currency was devalued by 26.4%. Throughout the remainder of 2009, the NBK maintained an exchange rate of 150 to the dollar, plus or minus three percent. In contrast, from the third quarter of 2008 to the first quarter of 2009, the nominal exchange rate of the Russian ruble decreased by 43.6%, the Ukrainian hryvna by 62.1%, the Latvian lat by 15.5%, and the Hungarian forint by 45.9%. In addition, the NBK's 2009 Financial Stability Report noted that Kazakhstan's reserves declined significantly less than those of Russia, Ukraine, and Latvia. From the beginning of 2008 to the first quarter of 2009, Russia's international reserves fell by 31% , Latvia's by 33%, and Ukraine's 24%, while Kazakhstan's declined by only 14% . In 2009, real GDP in Russia contracted 10.9%, in Ukraine 17.8%, and in Latvia 18.7%, while in Kazakhstan, real GDP shrank by 2.2%. Meanwhile, the National Bank of Kazakhstan managed to replenish its gold and foreign currency reserves, which grew from $19.87 billion in December 2008 to $23.22 billion as of December 2009. NEW CURRENCY CORRIDOR FOR THE TENGE ¶4. (U) On December 30, 2009, the NBK officially declared it would widen the tenge-dollar exchange corridor from February 5, 2010 to March 20, 2011. Thus, the tenge will be allowed to appreciate in value by 15% (127.5 to the dollar),or depreciate by 10% (165 to the dollar). The Governor of the National Bank of Kazakhstan, Grigoriy Marchenko, said at a press conference on January 27 that the new corridor reflected his assessment that the tenge is more likely to appreciate than depreciate during this period. Marchenko explained that the exchange rate would nevertheless be vulnerable to a number of factors, including export prices, the balance of payments, and exchange rates between the dollar and euro, the ruble and dollar, and the ruble and euro. TWO FUNDAMENTAL FACTORS DRIVE TENGE APPRECIATION ¶5. (U) According to an article in the "Business and Vlast" newspaper on January 22, two major factors are likely to contribute to further tenge appreciation: rising export prices and an improving balance of payments. The National Bank forecast assumes that oil prices will remain at current levels for the duration of 2010, while prices for other major exports such as metals, coal, and wheat would remain high throughout 2010. (NOTE: In November 2009, copper prices increased by 6.2%, lead by 3%, zinc by 5.8%, and wheat by 16.6%, compared to October 2009. END NOTE). According to the NBK's 2009 Financial Stability Report, the balance of payments is unlikely to worsen due to declining world commodity prices. The same report noted that Kazakhstan ended 2009 with an estimated balance of payment surplus of 2.1% of GDP, and the projected a surplus of 0.7-1% in 2010. Gold and currency reserves of the National Bank will continue to grow in 2010, albeit moderately, and, according to the NBK, will cover not less than six months of imported goods and services. Sabit Khakimzhanov, an analyst with Halyk Finance, said in a company newsletter on January 25 that he expects an appreciation of the tenge in the short-term, while the NBK reaps the benefits of an undervalued currency. ¶6. (U) The National Bank began to adjust its exchange rate policy ASTANA 00000163 002.3 OF 002 in 2009. In November 2009, for example, the NBK announced plans to widen the currency corridor following news of a markedly improved balance of payment. According to Halyk Finance's Khakimzhanov, the NBK purchased $2 billion in November 2009. During the first three weeks of January, the NBK intervened in the market daily as essentially the only seller of the tenge. According to Khakimzhanov, the NBK was the only buyer of the dollar on Kazakhstan's currency markets in early January, purchasing $2.35 billion from January 5-22. A "DANCE FLOOR", NOT A CORRIDOR ¶7. (SBU) The NBK's Deputy Director of the Department for Balance of Payments and Currency Regulation, Aigul Boranbayeva, told Econ Officer on January 25 that the new currency corridor will be more of a "dance floor" than a corridor. She said that a variety of factors will have an unpredictable impact on the tenge exchange rate, including the new tariff regime of the Customs Union, debt restructuring negotiations with Alliance and BTA banks, and commodity prices. As a result, she said, the National Bank decided to ease up on a strict currency band and allow the tenge to fluctuate more freely. LIMITS OF TENGE APPRECIATION ¶8. (SBU) Boranbayeva did not rule out the possibility of a sudden appreciation of the tenge, from 148 KTZ/USD, for example, to 127 KTZ/USD. However, according to Halyk's Khakimzhanov, a sharp appreciation so soon after the introduction of a new band would only increase market volatility, and force the NBK to intervene to stabilize the currency, which would draw down the country's foreign currency reserves. READ MY LIPS: NO NEW DEVALUATION ¶9. (U) Marchenko said at a press conference on January 27 that there will not be a new devaluation of the tenge. He joked that "conspiracy theories will continue, but the population trusts us more and more." He added emphatically that "there will not be a new devaluation or a sharp appreciation of the tenge on February 5, 2010." ¶10. (SBU) COMMENT: A wide range of factors will affect the value of the tenge, including foreign trade volumes. Approximately 37% of Kazakhstan's external trade is with Russia. The Customs Union is expected to boost Kazakhstan's trade with Russia, and will consequently strengthen the tenge's tie to the Russian ruble. For the National Bank, that has both risks and rewards. Marchenko's top priority is ensuring a stable exchange rate within a flexible corridor. As long as the Russian ruble is stable, or appreciates, the tenge will not come under intense pressure. If, however, the ruble falls and the tenge does not follow, it will make Russian imports cheaper and Kazakhstani products less competitive. At that point, Marchenko may come under political pressure to intervene. END COMMENT. SPRATLEN