Why the Tenge Weakened Sharply in September

At the end of September, everyone was focused on the tenge's exchange rate against the US dollar and the reasons for such a sharp weakening of the currency. I am often asked: "Oil prices are rising and the ruble is strengthening, but the tenge is falling. Shouldn't it be strengthening?" There is, of course, an explanation.

In developed countries, any change, whether in oil prices, the base rate, unemployment data, GDP growth figures and so on, signals to market participants what consequences await the economy. That in turn prompts them to sell or buy currency, and it all happens within seconds, because the market is developed and market agents face no restrictions on minimizing the future consequences of those signals. As a result, we see the exchange rate react instantly to one event or another. In Kazakhstan, unfortunately, this does not work, and so our exchange rate moves only after a signal has turned into a consequence. There are a number of reasons for this, all of them related to restrictions on the market and its participants:

Legal entities cannot buy foreign currency in advance without a currency contract. Accordingly, if a signal comes that the tenge will fall, and a company needs foreign currency to minimize its future costs, it cannot buy it. Signals therefore do not work here.

Banks are constantly monitored for their currency positions, and at one time controls on banks' currency positions were introduced. I do not know whether these controls have been lifted, but they also prevented signals from working.

Individuals have no access to exchange infrastructure, since ours is still underdeveloped. Currency exchange therefore takes place only within the banking system, where the savings function predominates, and individuals change currency only after it has already lost value.

Of course, all of this was introduced to reduce exchange rate volatility, but on the other hand these measures have completely devalued the market mechanisms of exchange rate formation.

That is why, for example, when the ruble depreciated, the effect on our exchange rate came only after imports of Russian goods into Kazakhstan increased, and the higher demand for foreign currency needed to pay for those imports put our currency under pressure.

The functioning of currency signals is very important for minimizing risks. For example, if signals worked, the tenge should have responded with weakening as early as July, and the risks to our industry would thereby have been minimized.

Therefore, to minimize risks to the economy, it is important to develop the currency market and remove the restrictions on its operation, so that it can perform its proper function.

As for a currency forecast, I can only point to the factors that will have an influence in the near future:

High oil prices ensure a fairly good inflow of foreign currency into the market, so this should support the tenge. But that will happen only if oil companies actually sell this currency. For that, they must buy something in Kazakhstan.

The main taxes are paid in November and December: in November, subsoil users will pay taxes for the third quarter, and in December everyone will make advance CIT payments. Here, too, all hopes rest on oil and mining companies, which have high profits. This should support the tenge.

Government spending has risen sharply over previous periods. Growth in spending always leads to growth in consumption, which is mostly met through imports. Import growth affects the tenge: the exchange rate weakens.

The Russian ruble is under pressure again and is depreciating. A cheap ruble encourages Russian imports to flow into our market and displace our own producers. This will weigh on the exchange rate, as imports increase.

Inflation is falling, and the base rate will be reviewed in October. A lower base rate will lead to lower rates on deposits and loans. Lower deposit rates will encourage growth in dollar deposits, and this will affect the tenge's exchange rate. Lower lending rates will also boost lending, which leads to higher consumption, and consumption is met through imports, which affects the tenge.

So some factors are restraining the currency's depreciation, while others are driving it. Everyone can draw their own conclusions.