Where the Tenge Is Headed as Oil Prices Fall

Oil prices have fallen even further and have already broken through the $35-per-barrel mark. Our main benchmark, the Russian ruble, has crossed 75 rubles to the dollar.

As it happens, Kazakhstan's foreign exchange market has only one player, the National Bank of Kazakhstan (NBK), which now decides for itself what the equilibrium rate should be, watching the trends in oil and the ruble in order to support the budget and our exporters. Judging by the National Bank governor's latest interview, the regulator's main task is neither fighting inflation nor conducting monetary policy, but filling the budget and supporting exporters. Yet that is more properly a task for the government.

As for foreign-currency exports in Kazakhstan, taxes broadly flow as follows: those from the oil sector go to the National Fund, and those from other subsoil users go to the budget. Since a fairly large share of the national budget is financed from the National Fund, revenues from the oil sector also affect budget execution. There is also one flat-rate tax, the export customs duty (ECD), which goes entirely to the national budget. At an ECD of $60 per ton, the tax comes to $8.5 per barrel. At current prices, therefore, the tax amounts to almost 25% of the value of the oil.

How are foreign-currency earnings linked to budget revenues?

1. Export customs duty. The ECD is pegged to the dollar. Accordingly, if the tenge falls by 5%, budget revenues in tenge terms rise by 5%.

2. Export rent tax. If oil prices fall by 5% and the tenge weakens by 5%, budget revenues remain at the same level. However, at a barrel price of $40 or lower, the rent tax is zero. I therefore expect no revenues from this tax in the second quarter of 2016.

3. Corporate income tax (CIT). Since part of exporters' costs is denominated in tenge, the task when oil prices fall is to keep revenue in tenge terms at the same level, or even to increase it, because another part of their costs is denominated in dollars. So if, for example, oil prices fall by 5% and the tenge depreciates by 5%, an exporter's revenue will not change, while its costs will rise by the share of its foreign-currency expenses. Profit will therefore decline only slightly, and CIT revenues to the budget will not change much.

4. Import VAT. Most import contracts are denominated in dollars. When an importer pays VAT, the tax credit is not applied immediately. Naturally, the weaker the tenge, the greater the revenues in tenge terms, and budget revenues rise accordingly. But there is a flip side: when imports fall, a stronger tenge raises VAT only in the short term. Incidentally, this is a good tool in the hands of the Committee of State Revenues: knowing roughly when imports peak, it can use the exchange rate to boost budget revenues significantly.

5. Inflation and higher nominal profit. When the tenge depreciates, inflation rises. If costs and revenues grow proportionally, nominal CIT also grows, which likewise increases budget revenues. Here too, though, there is another side to the process: lower purchasing power and falling demand. This tool works more over the medium term.

Now to the effect on the expenditure side of the budget.

Since most of the national budget is formed in tenge, expenditures remain at the same level, while revenues are made up through nominal growth resulting from the depreciation of the tenge. All this means that, in nominal terms, both the revenue and expenditure sides of the budget will be met. In reality, however, public-sector employees will grow poorer on the funds they receive from the budget, because their purchasing power will fall sharply.

But all of this is a short-term effect. When reserves run out and it is no longer possible to hold inflation down artificially, hyperinflation may follow, which will only impoverish the population. To prevent this, we need a broad set of both immediate and strategic decisions, with deep reforms aimed at stimulating the economy and liberalizing society.

Now let me return to the National Bank. When it declares that it will not allow the tenge to strengthen, in order to fill the budget and help exporters, there can be no talk of dedollarization in the foreseeable future. It will not happen, which means that anyone holding dollars will certainly not lose out. With liquidity tight and dedollarization effectively abandoned, the banking sector will experience severe stress in 2016.

So we should expect a new equilibrium "market" rate from the National Bank at around 360–370 tenge to the dollar.