Crisis undermines confidence in tenge - Moody's
Almaty. March 6. KazTAG - The crisis in Russia undermined confidence in tenge inducing people to convert tenge into dollars, reports the Moody's Investors Service.
"Because of the oil price drop and economic slowdown in Russia, Kazakh real GDP grew at a slightly slower pace in 2014 than in previous years, at 4.3%, compared to 6.0% in 2013,” said the agency. Moreover, the Kazakh government has revised down its real GDP growth forecasts to 1.5% for 2015, 2.3% for 2016, and 3.4% for 2017, from 6% forecasted previously. The downward revision is based on a lower $50 dollar-per-barrel price of oil over the 2015 to 2017 period and also reflects the prospects of a large economic contraction in Russia.
“The Kazakh authorities also forecast a current account deficit of -3.9% of GDP in 2015, assuming again a $50 dollar-per-barrel oil price, and Moody's forecasts that the fiscal deficit will be -2.3% in 2015," said the experts.
The agency reminded to counteract the drop in external demand, the president of Kazakhstan, Nursultan Nazarbayev, announced in November a new five year plan, Nurly Zhol (Bright Path), which includes a fiscal stimulus program of $9 billion, $3 billion annually over three years, to be financed by funds from Kazakhstan's sovereign wealth fund, the National Fund of the Republic of Kazakhstan (NFRK). Priorities of government spending include large transportation
infrastructure projects to support the government's strategy to make Kazakhstan a regional logistic hub, retiring non-performing loans so that they account for 10% of gross loans by the start of 2016 from their current level of 24%, supporting SMEs to further economic diversification and constructing school and housing projects. In addition, Kazakhstan recently signed agreements with China, France, and Iran to develop its energy and
transportation infrastructure and non-hydrocarbon industries, such as potash mining and automobile manufacturing.
"The drop in the price of oil and capital flight have put downward pressure on the tenge since the end of 2014. Despite President Nazarbayev's announcement in December that Kazakhstan would move towards inflation targeting in the medium term, the Kazakh authorities continue to maintain the exchange rate level at around 185 tenge to the US dollar - at an estimated cost of $2 to $3 billion a month. Contagion effects from the crisis in Russia
have undermined confidence in the tenge, inducing induced individuals to convert tenge into dollars. This has reduced tenge money supply and has increased dollarization to 55% at the end of 2014 from 37% at the end of 2013," reads the message.
In addition, the central bank has raised tenge interest rates to stem the flight from the tenge. Even if successful, tighter monetary policy will likely result in a decline in private investment in 2015.
Last, the Kazakh parliament approved a bill to hold Presidential elections on April 26, a year and a half earlier than planned. Hence, a devaluation of the tenge is unlikely until then.