On the Tenge–Dollar Exchange Rate

I have written about the tenge-dollar exchange rate many times, and I will take another angle here. The tenge is currently quite strong, which raises questions for many people.

The dollar is like an exchange-traded commodity: its price is set by supply and demand. To understand which way the tenge will move, we need to know who prevails in the market: sellers or buyers.

Broadly speaking, the following players sell dollars:

Exporters sell dollars to meet their tenge obligations within the country, such as operating expenses and taxes. Our main exporters are subsoil users, for whom taxes are the largest expense item, so during tax payment periods exporters sell more foreign currency.

The National Fund sells dollars to finance regular transfers that top up the budget. The larger the transfer from the National Fund, the more dollars are sold on the market, which is what we are seeing now. The budget deficit draws ever more money from the National Fund, because there is currently a fairly large shortfall in budget execution, and projects financed from the National Fund have also begun.

Holders of deposits and other foreign-currency financial assets sell them to move into higher-yielding tenge instruments. This is especially relevant here: the low yield on foreign-currency financial assets and the high yield on tenge ones encourage people to sell foreign currency and switch to tenge.

Investors who come to Kazakhstan and implement projects also sell foreign currency.

The following categories buy dollars:

Importers buy goods, works and services (GWS) with foreign currency and bring them into Kazakhstan. The higher the demand for imported GWS, the more dollars are bought for imports. Demand grows when government spending and lending, especially consumer lending, are rising. Both government spending and consumer lending are growing here, so imports are rising and will keep rising. When money arrives from the National Fund, it goes into spending, which is then converted into imports of GWS. In the long term, a strong tenge makes goods produced in Kazakhstan expensive in foreign-currency terms and less competitive than imports. As a result, imports increase, we buy more foreign currency, and this leads to a depreciation of the tenge.

The UAPF and the National Fund buy foreign currency on the market to invest abroad, since the money flows into these funds in tenge.

Holders of deposits and other financial assets buy dollars because they expect the currency to depreciate, and so they buy it to preserve their savings.

Foreign investors buy foreign currency to take their invested funds and the profits they have earned out of the country.

There are many other players that buy and sell foreign currency, but these are the main ones. Accordingly, when one category or another grows, it is reflected in the tenge's exchange rate against the dollar.

The most important of all are importers and exporters. At present we are most likely seeing the National Fund sell foreign currency for its next transfer to the budget. In addition, until the end of December, advance CIT payments are being adjusted, and many companies defer their advance payments to the end of the year. Those who understated their profit in their advance payments will adjust and increase them, which means they will sell foreign currency to meet their tax obligations.

Because some market participants face restrictions imposed by the state and do not have full, direct access to the foreign exchange market, market signals do not work properly. For example, oil prices have now fallen sharply, but this signal will reach the market later, when it affects export revenue.