Kazakhstan Turns From Brink of Costly Devaluation as Ruble Soars

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For the first time in more than a year, investors seem to believe the Kazakh president when he says he’ll avoid any sudden depreciation in the exchange rate.

HSBC Holdings Plc and Jefferies International Ltd. have abandoned projections of an imminent tenge devaluation. Any weakening in the next few months is unlikely to be more than 10 percent, about half their previous forecasts, the analysts said.

President Nursultan Nazarbayev promised last week he’ll avoid any “sharp” depreciation, echoing his pledge in February, to quell public concern over reduced spending power. The difference now is the record currency surge in Russia, Kazakhstan’s biggest trading partner, and recovery in crude prices, is helping to boost confidence in central Asia’s biggest oil exporter.

“Any devaluation will be smaller than previously expected and the timing less certain than before,” Richard Segal, head of emerging-market strategy at Jefferies in London, said by e-mail on April 29. “Oil has recovered, the ruble has bounced back and markets are calmer.”

The yields on Kazakh Eurobonds sold last year have plunged 138 basis points for the 10-year note and 69 basis points for the 30-year security since January highs, according to data compiled by Bloomberg. The improved outlook will help as the sovereign prepares to raise about $1.5 billion in its second Eurobond offering in more than a decade. The borrowing will help bridge the budget deficit amid a drop in economic growth to a quarter of the average in the past five years.

Social Unrest

“We see many reasons why the perception of an imminent, and large, tenge devaluation may be erroneous,” economists led by Ivan Tchakarov at Citigroup Inc. wrote in a note April 27. “These include real effective exchange rate levels that don’t signal undue loss of external competitiveness, large foreign-exchange reserve cushion, solid fiscal position, and the desire to avoid possible social unrest.”

Nazarbayev, who returned for a fifth term after a one-sided vote on April 26, has found it costly to contain public disquiet over official devaluation of the tenge. The last time he dropped the pegged currency’s value, with a 19 percent weakening in February 2014, he had to raise salaries and pensions to restore Kazakhs’ purchasing power. This time, the economic slowdown may leave him little room to do so.

Real growth in gross domestic product may slow to 1.5 percent this year, from an average 6 percent over the past five years, Moody’s Investors Service said March 31. The country faces a budget deficit of 3 percent this year.

‘Depreciation Unavoidable’

Nazarbayev’s comments on the tenge after his re-election prompted HSBC to push back its prediction of the timing for the depreciation to the first quarter of 2016 from the second quarter of this year. Still, the president won’t be able to avoid it altogether, economists led by Alexander Morozov wrote.

While the ruble’s 58 percent rally from its record low on Dec. 16 and oil above $65 a barrel have given back the nation some of its export competitiveness eroded by their slump last year, they haven’t undone all the damage. Since last year’s devaluation, the ruble and Brent crude are trading more than a third lower.

Without cheaper tenge, Kazakhstan risks running a current account deficit of as much as 9 percent of 2015-16 gross domestic product, seeing its reserves fall and struggling to avoid economic stagnation, Morozov wrote.

Borrowing Costs

Investors would welcome a cheaper tenge before the new Eurobond offering, said Sergey Dergachev, who helps oversee $13 billion of emerging-market debt as a senior money manager at Union Investment Privatfonds GmbH in Frankfurt. A depreciation would increase yields by 15 to 20 basis points, he said. May 6 is the deadline for bids to underwrite the offering.

The implied yield on 3-month non-deliverable forwards on tenge, or the cost to insure the currency against devaluation, fell to 33.27 percent on Monday, near a 2015 low and down from a peak of 88.25 percent in January.

“An earlier devaluation would lower borrowing costs,” Kaan Nazli, a senior economist at Neuberger Berman Europe Ltd. in The Hague, said by e-mail on April 28. It “would be welcomed by sovereign investors because it would help the Kazakh economy to adjust to the oil price shock and currency weakness in major trading partners such as Russia and the euro zone.”