Investors Resist 19% Yields as Kazakhstan Stifles Currency Gainsby
Landesbank Berlin says tenge intervention curbs carry trade
Central bank boosts yields at debt sales to lure buyers
Kazakhstan may fail to lure foreign investors by dangling outsized returns on local debt if the central bank keeps standing in the way of the tenge’s appreciation, according to Landesbank Berlin Investment GmbH.
The monetary authority has about tripled the amount of notes offered at daily auctions in 2016 and boosted yields on seven-day debt to as high as 19 percent in April as it seeks to draw more investors locally and abroad and give banks incentives to pay high interest rates on tenge deposits. The country’s benchmark interest rate is 17 percent.
Yet central bank dollar purchases are undercutting the appeal of local debt by preventing the tenge from rallying as much as other oil currencies like Russia’s ruble, said Landesbank Berlin’s Lutz Roehmeyer, who owns a small amount of Kazakh bonds and runs one of only a handful of emerging-market funds tracked by Morningstar Inc. that invests locally. As oil rallied about 70 percent from January lows, the tenge appreciated 11.5 percent in the past three months, lagging an advance of 18 percent for the ruble.
"It’s a really bad currency for foreign investors, as the carry is very small compared to others," said Roehmeyer, a Berlin-based money manager, estimating the tenge would be 10 percent stronger without central bank interference. "I’m against central bank intervening when the currency is heading to appreciation."
Central Asia’s biggest oil exporter switched to a free-floating exchange rate on Aug. 20 to boost competitiveness amid a collapse in crude prices and after currency devaluations in two of its main trading partners, China and Russia. Now, with growth and the tenge rebounding, the central bank has been active in the currency market again, this time to try to stem gains.
It bought $1.24 billion in March to avert a “sharp appreciation” it said would upset the balance of payments. Intervention data for April haven’t been released yet.
One reason policy makers have been wary about allowing the tenge to rise too quickly may be to reduce its volatility to encourage more citizens to switch their savings out of foreign currencies, which accounted for 69 percent of total deposits at the end of last year. As Kazakhs took advantage of tenge deposit rates of about 14 percent, that ratio dropped to 63 percent in March.
At a daily debt sale on April 20, the central bank issued 150 billion tenge ($458 million) of the notes at an annualized yield of 18.8 percent. By today’s auction, the yield on 200 billion tenge of securities fell to 15.1 percent.
While the debt is popular among local banks that need the yield to offset the cost of paying elevated interest rates to depositors, the central Asian country has found few takers among foreign fund managers, many of whom remember losses on $20 billion of debt from bank bailouts in 2009.
Risks to the economy posed by banks with a “legacy of problem loans” prompted Moody’s Investors Service to cut its ranking on the nation’s credit one level to its lowest investment-grade of Baa3 on April 22. One week later, Fitch Ratings downgraded to BBB, a step higher than Moody’s, citing government spending to keep state-owned companies afloat amid low oil prices.
Besides Roehmeyer’s Weltzins-Invest fund, Pimco’s GIS Emerging Local Bond fund has exposure to Kazakh sovereign default swaps, while Credit Suisse Group AG’s Institutional Master Fund Emerging Markets Bonds invests in state-owned grain trader National Holding KazAgro, according to Morningstar research.
The central bank is hoping high yields will woo international investors, Sabit Khakimzhanov, head of financial stability and risks at the regulator, said April 21 at a conference in Almaty. “They may want to come to Kazakhstan and earn on higher profitability and get some carry,” he said.
The central bank debt is among 121 bonds in the world from government and municipal issuers yielding 19 percent or more, according to data compiled by Bloomberg. In the developing market, Egypt Housing Bonds yield 42 percent while Egyptian treasury bills 19 percent, according to the data.
“This is a unique situation" where the currency is appreciating and yields are high, Timur Gabasov, treasurer at Centercredit Bank in Almaty said on April 20 when he bought some of the debt. Demand for the notes is coming from banks and their customers, he said.