The emerging market currency rout continues to encircle around the globe, and this time round, it is the country of Kazakhstan, where according to a Bloomberg News article published on January 12, 2014, it reported that two years after the former Soviet republics of Belarus, Kazakhstan, and Russia formed a trade pact, agreeing to open up the markets among their respective countries, the Kazakh government led by multi-term President, Mr. Nursultan Nazarbayev, has decided to go ahead with the plans to devalue the nation’s currency, the Tenge by 19.0 percent in order to compete with neighbouring Russia in terms of its roubles currency, which has fallen to a record of 41.0472 against the Russian central bank’s dollar-euro basket for the month of February 2014, dropping 6.3 percent year-to-date (YTD), & 15.0 percent since the start of 2013.
The Feb 12 announcement by the Kazakhstan government resulted in the Tenge currency tumbling to 184.55 per dollar, compared to the previous close of 155.63. One of the reasons outlined by President Nazarbayev on the currency devaluation was to ensure that the Tenge currency remains competitive in terms of Russian rouble currency. According to the Feb 12 Bloomberg news article and research provided by Russia-based fund house, VTB Capital, Kazakhstan, central Asia’s largest energy producer, was seeking to make its exports more competitive. Russia accounts for approximately 17.7 percent of Kazakhstan’s total trade flows, second after the European Union (EU) at 40.9 percent. The research provided by VTB Capital was based on website data obtained from the website of Kazakh’s statistics agency.
The latest devaluation came on the heels of what was supposedly the worst drop in emerging market currencies this year, including the so-called ‘Fragile Five’ comprising of Brazil, India, Indonesia, South Africa, and Turkey. The Kazakhstan government is no exception as the economy is starting to pick up due to the abundant natural resources, and a significant contributor to much of the regional growth around Central Asia. The main trading partner, Russia continues to account for the majority of Kazakhstan’s economy output, comprising of mainly natural resources. The move was also seen as significant as the debate continues to linger around the question of aggressive currency devaluations made by various nations, including Argentina, Turkey, among others.
However, the decision to devalue the Tenge currency remains quite controversial from the viewpoint of investors when it comes to determining the sustainability and effectiveness of such devaluation policies in emerging market economies such as Kazakhstan. The Feb 12 Bloomberg News article mentioned that Russia remains one of Kazakhstan’s top trading partners at 17.7 percent, and this clearly does indicate that the Kazakhstan economy is not well-diversified, and adopting many insular trade policies which might hamper its overall economic progress. Engaging in the so-called ‘currency wars’ among neighbouring nations, and trade partners might worsen the situation, and could trigger trade retaliation moves made by member countries. Despite the convincing words by President Nazarbayev saying that the devaluation was quoted, “The devaluation was purely a financial measure aimed at assisting the Kazakh enterprises, but this could be short-lived if it is not being accompanied by structural changes to the economy, such as nutrition care, education, health, infant mortality rates, investment levels, among other trade policies. The article also mentioned a quote made by Ms. Tatania Orlova, senior economist for Russia, the CIS, and Israel at Royal Bank of Scotland Plc (RBS) who said in note that the devaluation seems to aimed at the relatively small manufacturing sector to restore competitiveness, and non-commodity exports to Russia and Belarus are vulnerable to the local competition in Kazakhstan. This clearly shows that inflationary pressures caused by the devaluation of the Tenge currency by the Kazakh government could force businesses to shut down if costs through the increase in raw material prices outweigh the expected benefits in export competitiveness
In essence, what the entire devaluation moves made by the Kazakhstan government meant was to restore stability and competitiveness of the Tenge currency, but historically, such moves do not translate into immediate benefits, particularly of what many market participants have witnessed in the past, including the Asia-Financial Crisis, and the Global Recession Crisis (GRC), where closed economies, especially the weaker ones, are not able to handle the defend their currencies, and suffer the consequences of lower economic growth, high price levels needed to keep up with the loss of the purchasing power caused by the inflation coming from the devaluation of the Tenge currency.