"A Devaluation Forecast Looks More Like Lobbying Than a Real Assessment"

On Wednesday, April 8, leading international publications reported that Kazakhstan will need to devalue its currency by 20% to 45% in the foreseeable future, citing lower oil prices and the sharp weakening of the ruble. I would like to offer a few brief comments on this.

Let us begin with the first argument. Lower oil prices on global markets do significantly affect the country's budget. One way to increase budget revenue is to depreciate the currency, which raises the revenue side in nominal terms. However, such a gain would be short-lived, and several other factors need to be taken into account. For example, Kazakhstan's state budget, including transfers to the National Fund, has always been in surplus. Kazakhstan also has a very low debt burden and can raise borrowed funds at the sovereign level. And the main point: the National Fund was created in good times precisely for difficult periods like this one, and now is the time to use the oil savings.

Now to the ruble. Unlike the Kazakhstani tenge, the Russian ruble floats much more freely. After the panic and all manner of speculation in the market, we are seeing the ruble strengthen even with oil prices low. The ruble now stands at around 54–55 per US dollar. I believe that level, give or take 2–3 rubles, is the equilibrium rate at current oil prices.

Over the past year, the Russian ruble has lost 47% against the tenge. Now let us look at inflation. According to official statistics, inflation in Russia between March 2014 and March 2015 was 16.9%, including 23% for food products. Over the same period, inflation in Kazakhstan was 5.2%, including 6.2% for food products.

Thus, of the 47% by which the Russian currency has depreciated against the Kazakhstani one, 11.5% has already been offset by inflation. Inflation in Russia will accelerate, because stocks of imported goods are running out and the state will not be able to hold prices down by administrative means. As a result, by the end of the year we will see a gap in price growth between Kazakhstan and Russia of 12–15 percentage points. That means that by the end of 2015, 25–30% of the ruble's devaluation will have been offset. That leaves 17%. A gradual depreciation of the tenge of 6–7% this year could recoup another 7%. The difference in exchange rates would then come to 10%. That difference would be fully eliminated in 2016 through further gradual depreciation of the tenge and the inflation differential.

Therefore, proposing a devaluation of the tenge today, and one right after the elections at that, is disingenuous and looks more like lobbying than a real assessment of the situation.