Kazakhstan’s central bank decided to adopt an inflation targeting policy and to leave its domestic currency, the tenge, free floating instead of a trading corridor in the fallout of the sharp drop in oil prices – oil made up to 55% of current account receipts - and Central Asian currencies (notably the Russian Rouble) and the weak commodities prices perspective amid China’s economic slowdown. As a result, the tenge fell by more than 25% against the US dollar, joining the club of Emerging Market currencies (such as the Turkish Lira, the Brazilian Real, the Chilean Pesos, the Malaysian Ringgit, the South African Rand etc.) which are under pressure.

Impact on country risk

Credendo Group was expecting a devaluation of the tenge rather than a change in monetary policy. The decision to leave to tenge free floating rather than a trading band to the USD is a positive step as it allows the currency to move in line with the economic fundamentals and hence improve exporters’ competitiveness. Moreover, the monetary authorities no longer need to use the foreign exchange reserves to support the domestic currency. On the negative side, the tenge sharp depreciation impedes somewhat the commercial risk as it hampers the ability of the companies highly exposed to currency risk to pay back their obligations denominated in foreign currency. What is more, the highly dollarised banking sector -which is still recovering from the severe 2008 banking crisis – is likely to be affected which could obstruct access to credit. In addition, domestic tensions are likely to increase as the sharp fall in the tenge is likely to put inflation under pressure. During the latest devaluation episode (20% in February 2014), the government quickly reacted in order to avoid social unrest by imposing a temporary freeze on the price of bread and utilities and announcing an increase in public salaries.


Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com