Kazakhstan Devalues Amid Outflows From Emerging Markets

Kazakhstan’s central bank devalued the tenge by the most since 2009 as reduced bond buying by the U.S. Federal Reserve sparks capital outflows from emerging markets and the currency of its main trading partner weakens.

The currency will trade at 185 per dollar, with a range of 3 tenge on either side, the Almaty-based National Bank of Kazakhstan said in a statement. That indicates a devaluation of 19 percent, based on the mid-point of the target band. The tenge weakened to 184.52 per dollar at 6:31 p.m. in Almaty, compared with yesterday’s close of 155.63. The stock market rallied.

The devaluation, which follows a 5.4 percent weakening of Russia’s ruble this year, will bolster the central Asian nation’s competitiveness and reduce speculative pressure on the tenge, the central bank said in an e-mailed statement today. Argentina devalued the peso in January and Ukraine imposed capital controls to stem a plunge in the hryvnia last week as the Fed’s stimulus reduction curbs global appetite for risk.

“The scale of the move is clearly higher than we expected,” Vladimir Osakovskiy, a Moscow-based economist at Bank of America Corp., said in a note to clients. “We see limited devaluation pressures at the new level.”

The ruble, which Kazakhstan holds as a reserve currency along with dollars and euros, has weakened as the Russian economy slows and the central bank moves toward a free float.

Ruble Clone

The Russian currency’s decline has put additional pressure on the tenge, according to the Kazakh National Bank statement. Russia accounts for 17.7 percent of Kazakhstan’s total trade, second after the European Union at 40.9 percent, data from the statistics agency website show.

The ruble weakened the most since May 2012 last month as the flight from emerging-market assets prompted central banks in Turkey, South Africa and India to raise interest rates. A Bloomberg index of 20 emerging-market exchange rates has weakened 10 percent in the past 12 months and dropped this month to its lowest level since 2009.

Argentina devalued the peso 15 percent in the week ended Jan. 24 to persuade farmers to sell hoarded soybeans for dollars abroad. When that failed to stem the slide in central bank reserves, authorities imposed limits on commercial lenders’ foreign-currency holdings, which helped the peso rebound.

“The devaluation was a surprise for many people, considering the central bank’s assurances that the exchange rate is stable,” Damir Seisebayev, director of the analytical department at АО Private Asset Management in Almaty, said by e-mail. “But you have to be realistic. What is the tenge? It’s the ruble rate multiplied by five. This is a tested formula.”

Capacity Intact

Kairat Kelimbetov, the central bank chairman, told reporters in Almaty today that he learned of the decision to devalue the currency last night. The regulator has sufficient funds to support the new rate and will continue to smooth out sharp swings in the tenge, he said.

Kelimbetov, named central bank chairman in October, is planning to shift to inflation targeting to lower price growth to no more than 3 percent to 4 percent in the medium term, according to the statement. Inflation decelerated to 4.5 percent from a year earlier in January, the slowest since May 1999, according to the state statistics service.

“As a result of the reductions in quantitative easing in the U.S., capital is flowing from developing markets into developed markets, which has led to pressure on currencies,” the central bank said in the statement.

Surging Stocks

Kazakhstan’s $204 billion economy, almost the size of Ireland’s, expanded 5.7 percent in the third quarter of 2013, compared with the same period of the previous year.

The Kazakhstan Stock Exchange gained 12 percent after the announcement, data on the bourse’s website show. Kazakhmys Plc rose the most in five years in London as the devaluation lifted the profit outlook at the nation’s largest copper miner.

Kazakhmys jumped as much as 30 percent, the biggest gain intraday since Sept. 19, 2008. The devaluation may increase the company’s earnings before interest, taxes, depreciation and amortization by 53 percent in 2014 and 30 percent in 2015, Bank of America analyst Jason Fairclough wrote in a note to clients.

The tenge, introduced in 1993 after the breakup of the Soviet Union two years earlier, weakened the most against the dollar last month since July. Kazakhstan devalued its currency by 21 percent in February 2009, as the biggest energy producer in central Asia spent billions of dollars to support the economy and bail out its biggest lenders following the collapse of Lehman Brothers Holdings Inc.

Foreign Reserves

The central bank in Almaty had capacity to hold the tenge at its previous level, Bank of America’s Osakovskiy said. He had earlier forecast it would slide to 160 per dollar by the end of the year. The regulator had been supporting the currency at 145-155 to the dollar, according to its statement.

Kazakhstan’s international reserves dropped to $24.5 billion in January from $24.7 billion a month earlier, the central bank said last week. They fell to $23.7 billion in October, the lowest since December 2009, according to data compiled by Bloomberg.

“The move reflects a combination of factors, including the steady deterioration in the current-account position, worries over the impact of weak growth in Russia and the ruble’s managed depreciation,” Tim Ash, chief emerging-markets economist at Standard Bank Group Plc. in London, said in a note today.

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