Kazakhstan is about to take another step on the path to becoming a recognized mainstream economy by removing restrictions on its currency, the tenge. The country plans to make the tenge fully convertible in January.
“On January 1 the free flow of capital will be allowed, another step towards the tenge becoming fully convertible later,” says Arken Arystanov, chairman of the Regional Financial Centre of Almaty. The RFCA believes that the tenge’s float will assist corporates particularly, with oil companies expected to open accounts abroad to decrease onshore risks. Changes will also mean that the special licensing requirements needed to trade tenge will be removed, which is said to be attracting considerable interest among international banks. Goldman Sachs is among those believed to be looking at the opportunities that trading the currency presents. January’s changes in licensing mean it will only have to register before it starts.
But, despite the looming free float, there is uncertainty about how currency trading will develop in Kazakhstan. “Though the tenge officially becomes convertible in January, no one really knows the effects it will have. We have seen drafts but there are still questions that need answering,” says Slava Alexanian, treasurer for Citigroup in Almaty, Kazakhstan.
Analysts feel there is a need for Kazakhstan’s central bank, the National Bank of Kazakhstan, to clarify its position. For instance, although intervention in the currency market is contrary to its guidelines, it took steps to halt the tenge’s appreciation in mid-2006 by buying dollars. Furthermore, the central bank appears caught between its desire to keep the currency competitive and the management of the massive foreign direct investment that is pouring into the country.
In November 2006 the IMF advised Kazakhstan to increase its interest rates to counter the country’s above forecast inflation rate and to keep growth within the previously predicted range of 7% to 9%. But even though inflation rose above the forecast of 6% to 8% in November to 8.5%, so far there has been no rate increase. The view is that this will not happen, because such a move is seen as boosting the currency before the central bank is ready.
Still, analysts are predicting a rate increase early in 2007. Interest rates are reportedly close to those in the US, so the motivation to own the currency is not based on yield and positive carry. The tenge is seen as being basically bid. “I think people will want long tenge positions as we strongly believe it will start appreciating again. Many people have long dollar positions at the moment. But, as soon as they get the nod from the national bank, they are likely to shift to long positions on the tenge,” says Alexanian.
Since September 2006 the tenge has traded closely around 128 to the dollar. However, this stability came after the central bank took steps to weaken it after it had moved from 132 to 117. Michael Sauer, chief executive of Visor Capital, an investment bank in Almaty, agrees with Alexanian’s view of which way the tenge is going: “Despite tenge depreciation since August, I think the trend will reverse back soon and it will appreciate again in the short term. All the fundamentals are in place for this shift,” he says. Even the national bank has the same view, predicting that the currency will climb to 117 against the dollar in 2007.
The government has also recognized the attractiveness of the tenge but it wants to stop any rapid appreciation. Action was taken in 2006 as the tenge strengthened, because this was deemed to have a negative effect on local economic development. “Although the market was attractive for foreign speculators, the central bank saw these moves as dangerous for the economy,” says Jurgen Rigterink, country executive for ABN Amro in Kazakhstan.
Another measure to maintain currency stability is the creation of the National Oil Fund of Kazakhstan, modelled on Norway’s Petroleum Fund. The fund collects and manages Kazakhstan’s oil revenues in a manner that aims to limit the pressure inward capital flows put on the tenge. In addition, minimum reserve requirements have been set, 8% for local banks and 6% for foreign banks. These moves are not aimed at discouraging investment; rather it is hope that they will prevent currency shocks, particularly tenge strength.
“The National Bank set minimum reserve requirements to reduce the foreign borrowing from local banks as they felt this was one of the reasons for the increase of inflation,” says Timur Ishmuratov, managing director of Bank CenterCredit in Almaty.
The RFCA believes that free flow of capital is a necessity to fulfil its mandate of creating a growing and attractive capital market in Almaty. The expectation is that full convertibility will increase liquidity and lead to the development of its fledgling currency options market.
Kazakhstan is keen to learn from other emerging market countries’ mistakes. Dutch disease – the situation where a currency is inflated as a result of the dominance of a natural resource to the detriment of manufacturing and exports – is actively being avoided with direct steps by the RFCA to diversify the economy and lessen dollar dependence. Boston Consulting Group predicts a three-fold increase to $150 billion in the market capitalization of the country’s public companies within three years. It seems that, despite the government’s moves to avoid currency appreciation, such a move is inevitable. The national bank and RFCA are prepared for this and are now setting the scene for the move to occur steadily over the next few years.
