The Tenge's Fall: A Panic Attack

Kazakhstan's reality is such that any downward move in the exchange rate immediately causes panic among the public, especially when that panic is stoked by armchair experts.

So whenever the tenge weakens by even 5 tenge, the number of people rushing to convert their tenge into dollars rises significantly.

This comes down to herd behavior and heightened expectations, neither of which is backed by any significant fundamental factors.

I have put together a chart of the tenge against the US dollar and the Russian ruble.

1. The tenge's strongest rate against the US dollar has been 310, and its weakest has been 380.

2. There is a pronounced seasonal trend. In 2016, the tenge strengthened from 380 at the start of the year to 320 in June, then began to weaken in July, falling to 354 tenge per US dollar in early August. This year the picture is similar: the rate strengthened from January to 310 and began to weaken in July and August. Yesterday it reached 335.

Today it has already recovered by 1 tenge. There are, of course, many factors at play, but one of the more important is the vacation season, when a substantial amount of tourist money flows out of the country. This year that outflow is partly offset by EXPO visitors, but in fact the most significant factor is the imposition of sanctions against Russia.

3. The Russian ruble. Over 1.5 years, the tenge has weakened from 4.6 to 5.5 tenge per ruble. Understanding the reason would require additional, more detailed analysis. I attribute it, however, to Kazakhstan's higher inflation and its greater dependence on imports compared with Russia.

Nevertheless, the chart shows that since around November 2016 the tenge has been highly correlated with the Russian ruble and has stayed within a corridor of 5.4–5.6 tenge per ruble.

This suggests that the fundamental factors affecting the Russian ruble apply to the tenge as well.

At present, the ruble is in fact driven by oil prices and the sanctions against Russia.

The sanctions do not affect Kazakhstan directly, but they reach us through the ruble. Let me try to explain why.

The Russian Federation is Kazakhstan's most important trading partner. If the ruble weakens and the tenge does not, this will affect the country's balance of payments in the short term. A cheap ruble means more imports of Russian goods into Kazakhstan, because Kazakhstani goods become more expensive when priced in rubles.

I think this is one of the main reasons the ruble influences the tenge.

Both Russia and Kazakhstan now practice inflation targeting. Inflation expectations in Russia are at 6 percent, while in Kazakhstan they are at 8.

If the tenge were to weaken substantially against other currencies, it would be quite difficult for Kazakhstan to fight inflation, since our country depends more heavily on imports of goods and services.

Russia is the main source of Kazakhstan's food imports, so maintaining the exchange rate against the ruble matters most.

I also have a question for the armchair analysts: if the tenge strengthening from 380 to 310 is normal, is its weakening from 310 to 335 suddenly a devaluation?

Generally speaking, strange things go on in our society. When the tenge was strengthening against the dollar, everyone complained that they had lost their savings, because they had kept their money in dollars and now had far fewer tenge.

Now they are outraged that the tenge has weakened, and they are rushing to convert at 335.

The problem is that people are trying to profit from currency fluctuations.

In principle, with sound interest rate management, when the rate of depreciation is lower than the difference between deposit rates in foreign currency and in tenge, it is more profitable to hold money in tenge. With constant conversions, you lose not only on the currency traders' margin but also on exchange rate movements.

So here is my question: what counts as devaluation, if our exchange rate has been at 380, 360, 350 and 340? Presumably, when it moves past 380?