Kazakhstan Tenge Slides 23% as Emerging-Market Rout Strains Pegs

Updated on
Emerging Currencies Fallout Seen Posing a Risk to Bonds

Kazakhstan relinquished control of its exchange rate in the latest sign emerging nations will stop defending their currencies after China roiled global markets by devaluing the yuan.

The central Asian nation, which counts Russia and China as its top trading partners, said it was switching to a free float, triggering a 23 percent slide in the tenge to a record 257.21 per dollar. Since the shock yuan devaluation last week, a gauge of 20 developing-nation exchange rates capped its longest slump since 2000, Vietnam devalued the dong and currencies from Russia to Turkey and Malaysia slid at least 4.6 percent.

“The appearance of China weakening its exchange rate to boost growth has added urgency for policymakers elsewhere to do what they can to grab more export revenue,” Koon Chow, a strategist at Union Bancaire Privee in London, said by e-mail. “It was probably no small thing that Russia and China are also big trading partners of Kazakhstan.”

Kazakhstan is central Asia’s biggest crude exporter and the country’s raw material producers have suffered since Russia stopped managing the ruble last November. In addition to the 55 percent slide in oil in the past year, the yuan move elevated pressure on the nation’s peg by forcing countries that rely on Russia and China for trade to seek ways to stay competitive.

Reconsidering fixed exchange rates is also becoming more urgent as the Federal Reserve moves closer to raising interest rates for the first time since 2006, which is stifling demand for riskier assets.

Troubled Ten

The yuan slide added more support for emerging-market bears by shifting investor attention to countries that ship goods to China. Morgan Stanley pointed to 10 countries that are most at risk, or the “Troubled Ten,” including Brazil, Peru, South Korea, Thailand, Taiwan and South Africa.

South Africa’s rand tumbled past 13 per dollar for the first time since 2001 on Thursday and the Brazilian real has fallen the most among developing countries in 2015. Turkey’s lira retreated to an all-time low for a sixth day while the Malaysian ringgit traded at a 17-year trough, both also plagued by domestic political turmoil.

Amid the rout, Nigeria, Africa’s largest crude producer, said it hasn’t “seen any reason” to change its foreign-exchange policies, Ugochukwu Okoroafor, a spokesman for the Central Bank of Nigeria, said by phone from Abuja.

Who’s Next

Kazakhstan’s decision came after tumbling oil prices and sanctions over the conflict in Ukraine drove the ruble down 46 percent in the past 12 months, versus a 7.6 percent weakening for the tenge before today’s switch. The central bank spent $28 billion to defend the currency in 2014 and 2015, Kazakh President Nursultan Nazarbayev said today, adding the country must adjust to living with a crude price of $30 to $40 per barrel.

The country’s reserves must be saved and exporters will be consulted on selling their foreign-currency income to the government, Nazarbayev said.

Bonds fell for a fifth day, sending the yield on the government’s $2.5 billion of notes due July 2025 up six basis points to 5.89 percent, the highest since the debt was sold last month. The cost of protecting its debt against default climbed 12 basis points to 326, the highest since January, according to data provider CMA.

Even the depreciation on Thursday leaves the tenge vulnerable to further declines as it catches up, according to Citigroup Inc., which expects it to fall to 267 per dollar.

Business association Atameken and the chief executive officer of ArcelorMittal’s local unit were among corporate leaders complaining that the price differential made locally produced materials -- from steel to grains and coal -- more expensive than Russian alternatives.

Tenge Fallout

Tajikistan and Kyrgyzstan are most likely to suffer from the weaker tenge, BMI Research said in a note that was released on Wednesday after Kazakhstan allowed the currency to drop 4.5 percent in a precursor to the free float. SEB AB in Stockholm said Thursday that Kyrgyzstan’s som, Turkmenistan’s manat and the Tajiki somoni were next in line.

“They now face additional pressure to weaken by between 10 percent and 20 percent over the coming three to six months, perhaps even earlier,” said Per Hammarlund, the chief emerging-markets strategist at SEB in Stockholm.

Kazakhstan will pursue an inflation-targeting monetary policy, Prime Minister Karim Massimov told a government meeting in Astana. The central bank isn’t looking at a particular level for the currency, central bank Governor Kairat Kelimbetov said, adding it would only intervene if stability is threatened.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE