Galim Khussainov: The Dollar Should Rise by 27 Tenge a Year

One summer, a young man began speculating about a devaluation. I offered him a bet: we would each open a deposit of the same size, mine in tenge and his in US dollars, and after six months or a year, at his discretion, we would close them and record the returns. Whoever earned more would take both deposits. He agreed and even called me reckless, but he never called back and quietly disappeared.

I have now kept my savings in tenge for two years, surprising as that may sound.

On January 1, 2016, the exchange rate was 340 tenge per US dollar; on January 1, 2017, it was about 333 tenge. The current rate is 333–335. In effect, the rate has not changed much since 2016, while dollar deposits yield 1.5% and tenge deposits 12%. Last year the tenge yield was 14%, and many people locked it in. Clearly, tenge depositors have earned far more than dollar depositors.

Why am I writing this? Recently there was a discussion about the reasons for weak lending to the economy, and the question arose of what must be done to increase it.

There are many reasons, and I will try to describe some of them.

1. Dollarization of deposits

For second-tier banks, the most stable funding is deposits from individuals and companies. But where banks hold dollar liabilities, they can lend only in dollars. As a result, after two devaluations, second-tier banks face an imbalance: they have cheap foreign currency liquidity and a limited amount of tenge liquidity. Any upward move in the exchange rate of 5–10 tenge triggers a flow out of tenge into dollars, but when the tenge strengthens, the reverse conversion is much slower. Dollar lending is restricted at the regulator level, and borrowers themselves are reluctant to take such loans.

2. Lack of term deposits

The legal concept of a deposit in Kazakhstan is very blurred, and in our conditions a deposit is essentially no different from a current account. Any individual can terminate a deposit agreement and withdraw the money at any time, as can any company. This makes the financial system highly unstable. In such a situation, even a loan of under a year carries liquidity risk for a bank.

3. Lack of sound borrowers

Many sectors of the economy in Kazakhstan are heavily overleveraged, and it is now quite hard to find a safe haven that could be lent to without high risk. Construction is still stagnant, agriculture is overleveraged, manufacturing is in its infancy, and new fields are neither being brought on stream nor developed. What remains is the quasi-public subcontracting sector, trade, and consumer and mortgage lending.

4. Collateral and collateral policy

Second-tier banks now mostly use a collateral-based model of lending: hard collateral against a loan. Schemes based on cash flows, letters of credit, insurance and the like do not work. This is understandable, and it reflects the risks the banks took on in the banking storm of recent years.

5. Competition from development institutions

Many development institutions are now replacing second-tier banks in lending. Only recently has a trend emerged toward subsidizing through second-tier banks under the Damu Fund and Kazakhstan Mortgage Company (KMC) programs. Subsidization is the most suitable option in this situation, because banks have the full infrastructure, risk assessment systems, expertise and so on, which development institutions lack. This means the quality of borrowers coming through banks is higher than through state development institutions, which gives a greater benefit to the economy as a whole. So if one counts operating costs and the possible risk of loan defaults, it is cheaper for the state to use second-tier banks than to lend directly.

The list could go on, but the question always arises: what is to be done, and how can the situation be changed?

Solving the problem of dollarization of deposits requires a comprehensive approach, but it seems to me that the National Bank of Kazakhstan could try introducing foreign exchange forward contracts for second-tier banks as a tool for hedging currency risk. The forward rate could be set at the level of targeted inflation. Banks could then sell dollars for their own needs without involving the public, and this would not affect their currency position. In the short term the tenge would even strengthen, but I think that in this situation the National Bank could top up its gold and foreign exchange reserves to prevent a significant strengthening. This would allow the tenge to depreciate by the amount of inflation, which is right and logical from a macroeconomic point of view, since in the long run depreciation, as a rule, equals the difference between inflation in Kazakhstan and in the country issuing the currency. If we set an inflation target of 7–8%, this means the tenge can also depreciate by 7–8% over the year, or roughly 23–27 tenge a year in tenge terms.

That is, if the rate is now 334 tenge per dollar, then a dollar costing 357–361 tenge in a year would be a normal rate, at which tenge deposits would remain more profitable than dollar deposits, and the competitiveness of the economy would not suffer.

In other words, while our market economy is still fairly nominal (and getting to a real one requires learning a great deal, economic actors included), it is better to minimize devaluation expectations in the country. In 3–5 years we could begin gradually abandoning this policy in favor of fully market-based mechanisms. The rate would then not be regulated but left to the market to determine. If depreciation is less than 27 tenge, the banks are, in a manner of speaking, the losers; if it is more than that, the National Bank is. But whereas a bank cannot issue money, the National Bank can issue tenge, and therefore it bears no losses. Accordingly, the cost of funding would depend entirely on inflation in the country, which the regulator targets.

As for deposits, we do need term deposits for the stability of the system. It seems to me that the current type of deposit could be kept, but with significantly lower yields, with the highest rates reserved for term deposits.

In addition, we need to increase the involvement of economic actors in the stock market. For banks, the ability to raise funding through bonds means avoiding maturity risk, and for holders, it means the ability to obtain liquidity when needed.

Sound borrowers will appear as soon as the economy revives and the system is cleaned up. Cleaning up the system requires help, especially in simplifying bankruptcy and debt recovery procedures. Bankruptcy is a good tool for clearing out bad borrowers and making room for better ones.