Galim Khussainov
Inflation and the tengeBankingLending and mortgagesTaxationEconomy and public policyManagement

Banking · 3 min read

Why Kazakhstan's National Currency Has Collapsed Again

Translated from Russian with the help of AI. Original: Russian version

The National Bank of Kazakhstan is trying to hold up the tenge exchange rate at the expense of commercial banks by restricting their tenge liquidity. Market-based mechanisms are needed instead of artificially tight liquidity.

Kazakhstan's banking system is going through a difficult period. Second-tier banks are under heavy pressure from the tenge's exchange rate against the US dollar, and they can do nothing about it.

The National Bank of Kazakhstan (NBK) is trying to resolve the exchange rate problem at the banks' expense. It restricts their tenge liquidity, thereby forcing them to sell dollars and close out their foreign currency positions. On the other side, there are players who hold tenge and are buying up those dollars, thus trying to keep the dollar from being knocked down.

The main problem is that the National Bank, while claiming that the tenge floats freely, uses non-market mechanisms in its monetary policy.

In essence, the only commercial banks that win in this system are those with administrative leverage.

Right now there is no tenge anywhere except in the Unified Accumulative Pension Fund (UAPF). Accordingly, whoever has access to UAPF resources is the one who survives.

Banks are now facing a number of objective problems:

  1. Exchange rate losses. Financial institutions incur them because their main source of funding is in dollars, while clients ask for loans in tenge. Even high interest rates (20–30% per annum) do not cover these losses.

  2. A deteriorating loan portfolio. Many borrowers will now run into difficulties. Potential defaulters (here I am speaking of the corporate sector) can be divided into three categories:

  • borrowers who took out loans in dollars (and there are quite a few, considering that over the past year banks lived in permanent expectation of a devaluation);

  • borrowers whose business depends on imports (as purchasing power declines, their profitability will fall);

  • borrowers whose profitability depends entirely on consumer demand (their profitability will also "sag").

  1. A lack of tenge liquidity. Everything in the economy is interconnected. If the tenge falls, inflation rises. Accordingly, interest rates should rise with it, on both loans and deposits. But maximum deposit rates in our country are capped, and banks cannot raise them of their own accord. Seeing that tenge deposits are losing value, people prefer to keep their savings in dollars, and this leads to a lack of tenge liquidity in second-tier banks.

The National Bank's main problem is a lack of trust in the institution. On the one hand, the regulator assures us that the tenge is floating freely. On the other, it tries to manage the rate, artificially holding it up through a shortage of liquidity, and in doing so creates problems in the financial system.

Everyone understands that the rate is being managed, and so devaluation expectations do not go away but intensify, and as a result de-dollarization stalls.

Naturally, the tenge exchange rate depends on many factors, including oil prices. But banks should not be forced to keep working the old way; they should be given mechanisms that allow them to operate in current conditions.

It is absurd when the repo rate is 25–30% while the deposit rate is 10%.

  1. Liberalize rates on deposits in the national currency (for example, by linking them to some benchmark). This would allow second-tier banks to raise tenge deposits while guaranteeing the public a return in the national currency.

  2. Derivative financial instruments from the National Bank that make it possible to lock in an exchange rate for the future. If the regulator sold commercial banks one-year currency forwards at a fixed rate, it would give the market a reference point for the exchange rate. Let it be 350, 360 or 400 per dollar, but a reference point is needed.

  3. Yes, loan rates of 30% per annum are high. But what did the National Bank expect: that banks would borrow on the exchange at 25% and lend at 15%? That does not happen. Liquidity is, on the whole, better than high rates. And what do we have now? High rates combined with a lack of liquidity.

If we have embarked on liberalizing the economy, we must do it fully, not piecemeal. And trying to hold up the national currency at the expense of the banking system is like treating a cancer patient with a placebo.

Published in: Forbes.kz, 14 December 2015

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