Devaluation and Investment: Payback Periods Double

Investment planning

In the fight against the crisis, the central thesis everyone repeats is the need to diversify the economy. The argument goes that we must urgently saturate the domestic market with domestically made products and goods, and build a critical mass of export-oriented goods that would reduce the share of raw-material exports and increase the share of manufacturing.

The task is clear, and all the ministries rushed to carry it out. Development institutions were created and given money to develop. Money went to Samruk-Kazyna and to the banks, along with subsidies and so on.

Unfortunately, there was not enough time to build a critical mass. And now the question arises of whether to continue.

Kazakhstan has no equipment, technology, R&D or intellectual property of its own. In other words, if we want to build a production facility inside the country, we have no choice but to import the equipment and technology from abroad.

Over the past two years, the tenge has lost exactly half of its value against the US dollar.

In December 2013 the rate was 150 tenge per dollar; now it is 300.

Meanwhile, (official) inflation does not exceed 10% a year, and over two years it is 15%. In other words, a production facility planned now will take twice as long to pay back as one commissioned two years ago, because inflationary income is not enough to cover the exchange-rate loss on the investment.

Take an example. I buy equipment for $1 million, which now costs KZT 300 million, whereas two years ago it would have cost me KZT 150 million. Over this period revenue has grown by 15%, and so have costs, which means my profit growth will be 15%, against a 100% rise in the price of the equipment. And that is before accounting for the fall in consumer demand.

All of this comes with expensive borrowing and a complete absence of cheap long-term money in the country.

It has long been well known that the true cause of currency depreciation is slowing labor productivity growth relative to other countries.

Accordingly, if a country has no labor productivity growth, whether through higher prices for its goods or through gains in physical output from technology, it will always devalue its currency to allow its producers to compete with those of countries where productivity growth is higher.

In Kazakhstan, productivity growth has rested exclusively on rising world prices for energy resources and rising production of those resources. But with energy prices falling and output continuing to decline, productivity cannot be made up by other sectors, because it is not growing there.

With the tenge's fall, we can forget about further industrialization for the time being, since equipment and technology have become unaffordable a priori. That means forgetting about productivity growth too, and in a couple of years, to support our producers, we will again have to resort to extreme measures and devalue the tenge.

Oh yes, the tenge now floats on its own, and its decline will no longer depend on the state.

There are, however, economic agents for whom devaluation has been a great help: those who hold tenge loans taken out against foreign-currency contracts or real estate, and those who managed to buy equipment before the devaluation. They are now more competitive than those who are only just preparing to buy.