Yuan Ripples Reach Kazakhstan as Tenge Drops Most Since 2014

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Kazakhstan allowed its currency to weaken the most since a devaluation 18 months ago, signaling Central Asia’s biggest crude exporter wants to adjust to declines in the exchange rate of its top trading partners, China and Russia.

The tenge retreated 4.5 percent to 197.28 per dollar by 5:10 p.m. in Almaty. That was the steepest retreat since the central bank, which uses its foreign-currency reserves to manage the exchange rate within a trading band, let it drop about 20 percent in February 2014.

Pressure is mounting on countries that trade with China to let their currencies weaken after the yuan slide last week made their exports less competitive. Kazakhstan has also suffered from oil’s retreat in the past two months, especially since its northern neighbor and trading partner Russia is allowing the ruble to track crude’s drop.

“They realize that they cannot stand in front of a train,” Timothy Ash, the head of Europe, Mideast and Africa credit strategy at Nomura Holdings Inc. in London, said by e-mail. “Not now with little sign of oil prices improving, of emerging-market sentiment easing.”

Kazakhstan isn’t the only country that’s relaxing the reins on its currency amid a slump in prices that pushed a gauge of emerging-market currencies to their longest stretch of weekly declines since the turn of the century. Vietnam devalued the dong for the third time this year on Wednesday and widened the exchange rate’s trading band.

Bigger Declines

Faced with pressure from sliding oil prices and sanctions over the conflict in Ukraine, Russia stopped managing its currency in November 2014, and the ruble has fallen 45 percent versus the dollar in the past 12 months, compared with a 7.6 percent weakening for the tenge.

The Kazakh exchange rate now trades just one unit away from the upper limit of the central bank’s trading band, which Governor Kairat Kelimbetov raised in July. Bank representatives weren’t available to comment when contacted by Bloomberg.

The level will probably be breached in the coming days as the current corridor takes into account oil at $55 to $60 a barrel, Olzhas Khudaibergenov, a former adviser to the governor, said on his Facebook page. Brent crude dropped 3.1 percent to $47.28 a barrel on Wednesday.

Economists are predicting there are more losses in store. Ivan Tchakarov, a Moscow-based economist at Citigroup Inc., said the currency will touch 200 per dollar by year-end, and drop to 223 by the end of 2016, representing a 12 percent retreat from current levels.

More Bearish

Others were more bearish. Calling today’s move “small,” Demetrios Efstathiou, a strategist at ICBC Standard Bank Ltd. in London, said a further devaluation of as much as 15 percent is necessary to “convince the locals to convert some U.S. dollars back to tenges and help ease the huge tenge liquidity pressure in the system.”

Nomura Holdings Inc. said in an Aug. 12 note the currency would need to weaken to between 235 and 268 per dollar to “correct” imbalances due to the slide in commodity prices and the overvaluation of the real effective exchange rate. The central bank may make most of the adjustment at the end of the fourth quarter after rolling down its exposure to foreign-exchange swaps with banks, it said.

While the bank’s gross reserves have stayed little changed at $29 billion this year through July, assets of the Kazakh National Oil Fund are down 7.3 percent to $68 billion in the period, central bank data show. The government will probably post a budget deficit of 2.6 percent of gross domestic product this year, according to the median of seven forecasts compiled by Bloomberg.

The ruble’s slide led Kazakhstan to witness an influx of grain, metals, construction materials, oil products and coal from its northern neighbor due to the price differential, according to Kazakh business association Atameken. ArcelorMittal’s local unit proposed a “significant reduction” in worker salaries due to a surge in steel imports, Chief Executive Officer Vijay Mahadevan said Aug. 7.

ArcelorMittal said Wednesday that while it welcomed the devaluation, the tenge versus ruble exchange rate remained outside historical norms.

“The environment for our Kazakh operations remains highly challenging due to the high level of imports from Russia and elsewhere, and the lower pricing environment,” the world’s biggest steelmaker said in a statement.

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