The Costs of De-dollarization and Distrust of the Tenge
Translated from Russian with the help of AI. Original: Russian version
Restrictions on foreign currency deposit rates and lending are making dollar borrowing cheaper inside Kazakhstan than abroad, slowing de-dollarization and creating a risk of capital outflow. The population still does not trust the tenge, and a partial exchange-rate compensation mechanism for tenge depositors is proposed.
An interesting situation has developed in Kazakhstan's debt market.
The domestic cost of borrowing in US dollars is lower than the cost of borrowing abroad. If a Kazakhstani company were to go to Western markets today and ask for a loan, for most companies such borrowing would be far more expensive than borrowing inside Kazakhstan.
This is the result of the de-dollarization policy. Restrictions on dollar lending, together with caps on dollar deposit rates for individuals, have led to a situation in which banks, even when they raise US dollars, cannot put them to use through loans.
As the gap between tenge and dollar rates narrows, the pace of de-dollarization will slow, and the lower tenge deposit rates are, the fewer people will be willing to switch from dollars into tenge.
The current policy may lead to an outflow of foreign currency from the country in the future, since risk-adjusted returns abroad will be higher, and in some countries they already are.
An outflow through the capital account would put pressure on the tenge exchange rate, and the situation could deteriorate over the long term.
The main problem is that the population has still not come to trust the tenge exchange rate and constantly talks about devaluation.
Currently, the gap between deposit rates in tenge and in US dollars is 10 percentage points. This means that for a tenge depositor to incur a loss, the tenge would have to depreciate by more than 10% over the year, or by roughly 32 tenge at the current rate. Those depositors who switched from dollars into tenge last year clearly came out ahead. Those who did not switch now expect the tenge to fall, and so are not very eager to switch. Falling rates on tenge deposits discourage them from switching even more.
If depositors were confident that the tenge would not depreciate by more than 10%, most of them would switch into tenge. I believe the best option would be for the deposit guarantee fund to compensate households for part of the exchange-rate loss if the tenge depreciates by more than 10% in a year.
Published in: Facebook, 17 June 2017