By Guy Norton
Kazakhstan’s central bank governor Grigori Marchenko lashes out at critics of a one-off currency devaluation. He reckons stability will have returned by July – including to the troubled banking sector
One of Grigori Marchenko’s first moves when reappointed as chairman of the National Bank of Kazakhstan (NBK) at the start of this year was to devalue the currency by 18%. February’s move was intended to restore the competitiveness of the economy in the wake of devaluations by important trade partners such as Russia.
While the Russian central bank went for a step-by-step devaluation of the rouble over the course of November to January 2009, the NBK devalued the currency in one shot, with the bank announcing that it would support the currency in a new trading corridor of Kzt145–155/$ against the dollar.
The move drew heavy criticism from abroad. Some observers claimed that Kazakhstan should have followed the Russian example, but Marchenko shoots back: “These so-called experts don’t have responsibility for monetary policy in Kazakhstan. I do.”
He says that given the flight from the tenge in January – Kazakhs converted around $2 billion of tenge into cash dollars at exchange bureaux, while another $3.8 billion of tenge deposits were converted into dollar and euro deposits – the NBK had to act decisively to stem the haemorrhaging of foreign exchange reserves and restore confidence in the currency.
He points out that the one-off devaluation meant that there was none of the widespread currency speculation associated with a step-by-step devaluation, which cost Russia $200 billion of its hard-won reserves.
No second time
Marchenko is dismissive of the notion that there might be the need for a second devaluation of the currency, pointing to the fact that the currency has stabilized around the Kzt150/$ mark and that net reserves in April increased by $100 million. “That shows that we have got the trading corridor about right, that we didn’t devalue by too little or too much,” he tells Emerging Markets. On the reserves front, Marchenko says that the country is much better placed than when it last devalued the tenge in April 1999.
“In 1999 reserves were just $1.1 billion; now they are $41.1 billion,” he says, adding that while gross domestic product (GDP) has expanded 10 times in the intervening period, reserves have grown almost 40-fold.
“The level of reserves means we are in a different league to the likes of Hungary, Latvia and Romania,” says Marchenko.
He says that the decision to use export revenues to establish the Kazakhstan National Fund in 2000 to protect the economy against swings in the price of oil, gas, and metals has now proved to be an inspired one. “The creation of the fund was resisted by some people, who argued that we should spend the money instead, but it is very important that we made this strategic decision.”
At the end of April the fund boasted $22 billion in assets, while the NBK had $19.1 billion in reserves.
The oil factor
Marchenko says that with oil prices well above the $40 a barrel level in the government’s budget for 2009, pressure on the reserves has eased, but adds that even if oil prices fell to $25–30 a barrel the country has more than enough money to see it through the next 18–24 months.
After years of double-digit growth the Kazakh economy is expected to register a sharp slowdown in 2009, although Marchenko believes that if there is continued stability in the prices of a number of hard and soft commodities, the country could still avoid entering into a full-blown recession.
Marchenko believes that if oil prices remain around $50 a barrel, grain prices around $200 a tonne and copper prices around $4,250 a tonne, Kazakhstan will be able to register a 1–2% increase in GDP. While initially there were fears that the devaluation would ignite inflationary pressures, those fears have proved to be misplaced. “The idea that post-devaluation prices would go up by 25% or more was preposterous.”
Indeed, the latest available data shows that Kazakhstan has made great progress in combatting inflation over the last year. “In April 2008 inflation was running at 20%; in April this year it was 8.9%, so it has more than halved.”
The devaluation has increased the already hefty debt burdens of the Kazakh banks, which raised more than $40 billion in foreign currency-denominated debt abroad in the pre-credit crunch era. Marchenko says that it was therefore important that pre-devaluation the government should have stepped into the top four banks as a shareholder through the Samruk-Kaznya investment agency.
The country’s leading bank, BTA, and the fourth biggest lender, Alliance Bank, have already announced plans to restructure their debt, news of which has hit investor sentiment towards Kazakhstan, but Marchenko believes that the banks will be able to reach an amicable solution with their creditors by the end of the second quarter.
Given supportive factors such as firmer commodity prices, a stabilized currency and a resolution of the bank indebtedness problems, Marchenko believes that the economic outlook for Kazakhstan is brightening.
“By July we expect that the overall economic situation will be much better than it is now.”