Tenge float reflects Kazakh confidence, fears on dollar

December 09. Central Asia newswire

By Martin Sieff

Tenge float reflects Kazakh confidence, fears on dollarKazakhstan is restoring its tenge currency to a managed float after keeping it in a carefully controlled “corridor” against the U.S. dollar for nearly two years, the head of the country’s Central Bank announced on Tuesday.

The move reflects the oil- and gas-rich Central Asian nation’s remarkable success in restructuring three major failed banks since the global financial crisis of fall-2008 through 2009.

But it also reflects fears about the continued stability of the dollar and the euro, and may be seen as part of a long-term move by Kazakh corporations and planners to diversify their holdings into Asian markets and stock exchanges as a hedge against the increasing instability in Western ones.

Central Bank chairman Gregory Marchenko won high praise for his success in overseeing the restructuring of three of the country’s five major banks – BTA, Alliance and Timur Bank- following the 2008-9 financial crisis. He announced the return to a managed float on Tuesday.

According to a Reuters news agency report, Marchenko cautioned that the change had not yet been formally approved, but that he was going to recommend it to the board of the Central Bank. Effectively, that means the change will be made.

“Next year we will return to a managed float,” Marchenko announced to reporters according to the Reuters report. “The trading corridor is not needed,” he said. “I hope the (central bank) board will support us.”

The tenge, Kazakhstan’s national currency, currently is limited in its trading to a “corridor” of 127.5 tenge to 165 tenge to the U.S. dollar. This corridor was established after the tenge was devalued by 18 percent in February 2009.

Marchenko’s decision first of all reflects the increasingly bright long-term economic prospects for Kazakhstan.

Over the past year, global oil prices have soared to a current range of $80-$85 per barrel and are predicted to rise to $100 per barrel within five years and $150 within 25 years.

That is good news for Kazakhstan as its massive Kashagan super oil field is projected to come online in late 2012 or early 2013.

Also, a recent U.S. Department of Energy/ Energy information Administration (EIA) report in Washington predicted that by 2019, Kazakhstan will be one of the five most important oil-producing and -exporting nations in the world.

Also in the past year, Kazakhstan became the world’s biggest producer and exporter of uranium. And it signed a deal with China to supply high-quality uranium oxide for the 500 civilian power reactors China plans to build over the next 30 years. The deal will provide enormous, long-term and stable revenue.

Soaring global commodity prices for other metals, such as copper, and for grain have also contributed to Kazakhstan’s remarkable rebound and bright long-term prospects.

However, the decision to “free” the tenge also reflects a growing caution on the part of Kazakhstan’s financial planners towards the increasing volatility in Western currencies and markets.

U.S., British, German and Japanese bonds suffered their biggest sell-offs in more than two years this week since the start of the Wall Street financial meltdown in September 2008.

These fears were triggered by an apparent agreement between President Barack Obama and the Republican leaders of the outgoing 111th Congress in Washington to approve both tax cuts and the renewal of unemployment insurance.

Though some U.S. Democrats are angry over the deal, the tax cuts are still likely to be approved when the newly-elected Republican 112th Congress convenes next month.

However, Obama and his Federal Reserve Chairman Ben Bernanke have already decided to pump $600 billion in extra credit and liquidity into the domestic U.S. economy through their “Quantitative Expansion II”, or QEII, scheme. When the effects of continued tax cuts and unemployment benefits payments are added, this will increase the total extra stimulus to $900 billion.

The Kazakhs, like the Chinese, the South Koreans and most Western European leaders fear that this could lead to dangerous out-of-control inflation spreading around the world and impacting them, as well as the American public.

Kazakhstan is already suffering some inflationary pressures from its renewed rapid growth, and from the anticipated effect of its new customs union with Russia and Belarus raising the prices of many imported goods, especially quality food products.

Freeing the tenge from its corridor would, therefore, allow it to be cautiously raised in value against the dollar and other Western currencies, primarily the euro, thereby damping down inflationary pressures.

Floating the tenge also anticipates the possibility of a strengthening ruble in Kazakhstan’s main trading partner and fellow customs-union member Russia next door.

The tenge traded through November at an average rate of 147.5 to the U.S. dollar.

But on Tuesday, Marchenko admitted that to sustain this, the Kazakh Central Bank had to buy $650 million in U.S. dollars on international markets. Apparently as a direct consequence of this, Kazakhstan’s net gold and foreign currency reserves dropped to $27.3 billion by November 30 from $28.4 billion on October 31 – a fall of $700 million in one month.

Allowing the tenge to rise will also end the need to use up gold and currency reserves by buying dollars to maintain the current rate.