Tenge Float `Bold' Step for Fairly Permanent Shock, IMF Says

  • `Light at the end of the tunnel' hard to see, IMF says
  • Central bank to target CPI at IMF-forecast 8.6% next year

The pressures undercutting Kazakhstan’s currency “seem to be fairly permanent,” though the shift to a floating exchange rate will allow the country to absorb external shocks, protect international reserves, and remain competitive, the International Monetary Fund said.

The Washington-based lender said it has “great confidence” that the central bank will handle the transition to inflation targeting as the tenge is buffeted by factors including low energy prices, weakness in Russia’s ruble, an economic slowdown in neighboring China and a strengthening dollar.

“The tenge is expected to remain depreciated given that the shocks are long-lasting” and can continue for the next three to five years, Juha Kahkonen, the deputy director of the IMF’s Middle East and Central Asia department, said in an interview in Almaty on Thursday. “Kazakhstan’s move to the float was very bold, a good move.”

President Nursultan Nazarbayev has warned that central Asia’s biggest energy producer faces a “real crisis” that will be deeper than the downturn in 2009, when the government bailed out banks and spent $10 billion from its oil fund to prop up the economy. Kazakhstan cut its exchange rate loose in August to boost the tenge’s competitiveness after oil tumbled and Russia’s ruble plunged.

After dropping to a record in mid-September, the currency has stabilized as the central bank resumed interventions. The tenge strengthened to 277.07 against the dollar at 4:18 p.m. in Almaty, compared with 285 on Sept. 1. Earlier this month, central bank Governor Kairat Kelimbetov said a tenge rate of about 270 is balanced, provided oil remains at about $47 to $50 a barrel, Russia’s ruble stays at around 70 to the dollar and there no major changes in foreign-currency markets.

‘Casino’ Economy

Kelimbetov said on Friday that the central bank is targeting inflation at 6 percent to 8 percent for this and next year, and the balance-of-payments deficit is seen at “a bit more than 2 percent” while oil remains at around $50 per barrel.

The country’s benchmark interest rate will remain “high” until the economy and the exchange rate stabilize, and then there will be a reduction trend, he said, adding that the tenge rate is expected to stabilize in three to five months.

The IMF sees Kazakh inflation at 6.3 percent this year and 8.6 percent in 2016, it said in a report released on Friday. “The central bank is targeting the right level of inflation, which is the same as we expect,” Kahkonen said.

Economic growth will reach 1.5 percent this year and 2.4 percent in 2016 on improvements in oil production and the external environment, Kahkonen said. In the medium term, Kazakhstan won’t experience the fast pace of expansion -- 7.5 percent in 2011 -- as in recent years because it’s expected that oil prices won’t rise in the near future, Russia will recover slowly and the dollar won’t weakening against the ruble soon, Kahkonen said.

“The situation is difficult for the region already, and what makes it more difficult than previous difficult periods is that it doesn’t seem to be that temporary,” he said. “It’s not easy to see light at the end of the tunnel.”

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