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Kazakhstan Enters Ranks of Besieged Economies Feeling Economic Pressure, Kazakhstan Takes Sudden Action
(about 2 hours later)
Kazakhstan joined a growing list of emerging economies under pressure as its central bank moved to devalue the country’s currency on Tuesday.Kazakhstan joined a growing list of emerging economies under pressure as its central bank moved to devalue the country’s currency on Tuesday.
Taking stock of sharp currency declines in other markets like Turkey and Ukraine, the National Bank of Kazakhstan decided to act proactively, devaluing the tenge by about 20 percent against the dollar. But the announcement surprised financial markets, which were taken aback by the severity of the devaluation.Taking stock of sharp currency declines in other markets like Turkey and Ukraine, the National Bank of Kazakhstan decided to act proactively, devaluing the tenge by about 20 percent against the dollar. But the announcement surprised financial markets, which were taken aback by the severity of the devaluation.
“They decided to move along with other emerging-market currencies so as not to resist pressures globally,” said Vladimir Tikhomirov, chief economist at Otkritie Financial, a financial services firm in Moscow.“They decided to move along with other emerging-market currencies so as not to resist pressures globally,” said Vladimir Tikhomirov, chief economist at Otkritie Financial, a financial services firm in Moscow.
The move comes as Kazakhstan’s economy faces headwinds, a common story in the developing markets today. Like other major oil and gas producers, the country looks increasingly vulnerable as commodity prices have stabilized or even fallen in recent years; at the same time, imports fueled by growing domestic consumption have continued to rise. Kazakhstan’s economy faces headwinds, a common story in the developing markets today. Like other major oil and gas producers, the country looks increasingly vulnerable as commodity prices have stabilized or even fallen in recent years; at the same time, imports fueled by growing domestic consumption have continued to rise.
The economy, which expanded 6 percent last year, “has been firing on all cylinders,” Ivan Tchakarov, a Citigroup analyst based in Moscow, wrote in a research note on Tuesday.The economy, which expanded 6 percent last year, “has been firing on all cylinders,” Ivan Tchakarov, a Citigroup analyst based in Moscow, wrote in a research note on Tuesday.
But he added that a deterioration in its trade balance had eaten into foreign exchange reserves. Defending the tenge has also drained central bank reserves, which have declined by about $11 billion to about $25 billion over the last two years, according to Mr. Tchakarov’s note.But he added that a deterioration in its trade balance had eaten into foreign exchange reserves. Defending the tenge has also drained central bank reserves, which have declined by about $11 billion to about $25 billion over the last two years, according to Mr. Tchakarov’s note.
With a commodities boom coming to an end, “it should not be surprising that the economy has to adjust,” said Rachel Ziemba, an analyst at Roubini Global Economics who specializes in oil exporting countries.With a commodities boom coming to an end, “it should not be surprising that the economy has to adjust,” said Rachel Ziemba, an analyst at Roubini Global Economics who specializes in oil exporting countries.
Authorities have also kept a tight grip on the local currency, allowing speculative pressures to build. Mr. Tikhomirov said the bank was alarmed that speculators, including people in Russia, were stepping up their selling of the Kazakh currency against the dollar. And Russia is allowing the ruble to slide, further leaving the tenge exposed.Authorities have also kept a tight grip on the local currency, allowing speculative pressures to build. Mr. Tikhomirov said the bank was alarmed that speculators, including people in Russia, were stepping up their selling of the Kazakh currency against the dollar. And Russia is allowing the ruble to slide, further leaving the tenge exposed.
Kazakhstan has been one of the oil industry’s major growth stories, with production rising from about one million barrels a day in 2002 to about 1.7 million barrels a year ago. But the growth in oil production has slowed sharply since 2009, largely because a $50 billion project led by companies like Eni of Italy has been delayed for years. As a result, a current-account surplus that was more than 5 percent of gross domestic product in 2011 dwindled to an estimated 0.2 percent last year, according to Mr. Tchakarov.Kazakhstan has been one of the oil industry’s major growth stories, with production rising from about one million barrels a day in 2002 to about 1.7 million barrels a year ago. But the growth in oil production has slowed sharply since 2009, largely because a $50 billion project led by companies like Eni of Italy has been delayed for years. As a result, a current-account surplus that was more than 5 percent of gross domestic product in 2011 dwindled to an estimated 0.2 percent last year, according to Mr. Tchakarov.
While the devaluation will push up inflation, which is now running about 6 percent a year, most economists say the country is in better shape than many others to resist the pressure on emerging markets. In addition to healthy economic growth, Kazakhstan has an extra $70 billion stored away in a sovereign wealth fund that it does not count as part of reserves.While the devaluation will push up inflation, which is now running about 6 percent a year, most economists say the country is in better shape than many others to resist the pressure on emerging markets. In addition to healthy economic growth, Kazakhstan has an extra $70 billion stored away in a sovereign wealth fund that it does not count as part of reserves.
Kazakhstan does have one conspicuous weakness: a high level of debt and of bank loans that are in or near default, a legacy of a financial crisis in 2008-9. The rating agency Fitch says that 41 percent of bank borrowings were in foreign currency as of September, and the devaluation could add to pressure on the financial system.Kazakhstan does have one conspicuous weakness: a high level of debt and of bank loans that are in or near default, a legacy of a financial crisis in 2008-9. The rating agency Fitch says that 41 percent of bank borrowings were in foreign currency as of September, and the devaluation could add to pressure on the financial system.