Kazakh tenge evaluation reflects external realities, says S&P.
Standard & Poor's Ratings Services said that the decision by Kazakhstan's central bank (the National Bank of Kazakhstan) to allow the tenge to devalue by around 17 per cent to a new parity rate of 150 (with a +/- 3 per cent trading band) reflects new external realities but carries certain risks for the sovereign.
The devaluation is aimed at preserving reserve levels, which have come under pressure in recent months. A weaker currency is a positive for those export-oriented companies whose operating costs are local-currency denominated and should help compress non-essential imports. Even so, S&P expects Kazakhstan's current account to shift from a surplus of 7.1 per cent of GDP to a deficit of 2.1 per cent of GDP during 2009.
From a sovereign perspective, there are several risks associated with the devaluation, according to S&P. The impact on the banking sector, which is highly leveraged externally, is negative, suggesting a further rise in contingent liabilities to the sovereign. Primarily, the adjustment will contribute toward a further deterioration in banks' asset quality given extensive foreign currency lending to unhedged corporates and individuals earning in tenge.
It also pushes up gross external debt in the financial sector by more than six per cent of estimated 2009 GDP to 43 per cent of GDP. Nevertheless, the impact for the sovereign so far seems containable. Kazakhstan's fiscal and monetary reserves, at 42 per cent of GDP, remain substantial relative to nearly all peers. <p>The second chief risk is that confidence in monetary stability and, by association, the banking system could weaken further, triggering more downward pressure on the exchange rate. This, in turn, could cause a loss of system deposits, and reserves, should the Central Bank be forced to finance the further dollarisation of deposits. <p>The decision to cut the refinancing rate and loosen minimum reserve requirements for commercial banks indicates that the focus is squarely on getting liquidity to the banks rather than on targeting positive real interest rates or fighting inflation, the rating agency said. With external demand as weak as it is and energy prices down significantly, near-term price pressures have visibly relaxed. <p>Over the medium term, however, upward price pressures could reappear, particularly if fiscal stimulus remains concentrated on current rather than capital expenditure hikes. It will therefore be critical to see to what degree the depreciation passes through into inflation to gauge whether the adjustment has permanently boosted competitiveness. <p>Ultimately, external factors--particularly the trajectory of commodity prices--are likely to prove the main driver of exchange rate developments. Even after the devaluation, the tenge remains 17 per cent stronger versus the Russian ruble than it was at the end of June 2008.
2009 CPI Financial. All rights reserved.
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