Kazakhstan gives up control of its currency;
Tenge drops on free market
KAZAKHSTAN relinquished control of its exchange rate in the latest sign emerging nations will stop defending their currencies after China roiled global markets by devaluing the yuan.
The central Asian nation, which counts Russia and China as its top trading partners, said it was switching to a free float, triggering a 23 percent slide in the tenge to a record 257.21 per dollar. Since the yuan devaluation last week, a gauge of 20 developing-nation exchange rates capped its longest slump since 2000, Vietnam devalued the dong and currencies from Russia to Turkey and Malaysia slid at least 4.6 percent.
Chinese reaction
“The appearance of China weakening its exchange rate to boost growth has added urgency for policy makers elsewhere to do what they can to grab more export revenue,” said Koon Chow, a strategist at Union Bancaire Privee in London. “It was probably no small thing that Russia and China are also big trading partners of Kazakhstan.”
Kazakhstan is central Asia’s biggest crude exporter and the country’s raw material producers have suffered since Russia stopped managing the rouble last November. In addition to the 55 percent slide in oil in the past year, the yuan move elevated pressure on the nation’s peg by forcing countries that rely on Russia and China for trade to seek ways to stay competitive.
Reconsidering fixed exchange rates is also becoming more urgent as the Federal Reserve moves closer to raising interest rates for the first time since 2006, which is stifling demand for riskier assets.
The yuan slide added more support for emerging-market bears by shifting investor attention to countries that ship goods to China.
Morgan Stanley pointed to 10 countries that were most at risk, or the “Troubled Ten”, including Brazil, Peru, South Korea, Thailand, Taiwan and South Africa.
The Brazilian real has fallen the most among developing countries in this year. Turkey’s lira retreated to an all-time low for a sixth day while the Malaysian ringgit traded at a 17-year trough, both also plagued by domestic political turmoil.
Amid the rout, Central Bank of Nigeria spokesman Ugochukwu Okoroafor said Nigeria had not “seen any reason” to change its foreignexchange policies.
Kazakhstan’s decision came after tumbling oil prices and sanctions over the conflict in Ukraine drove the rouble down 46 percent in the past 12 months, versus a 7.6 percent weakening for the tenge before yesterday’s switch. The central bank spent $28 billion (R3652.5bn) to defend the currency in last year and this year, Kazakh President Nursultan Nazarbayev said yesterday, adding the country must adjust to living with a crude price of $30 to $40 per barrel.
The depreciation still leaves the tenge vulnerable to further drops as it catches up, according to Citigroup.
Business association Atameken and the chief executive of ArcelorMittal’s local unit were among those complaining that the price differential made locally produced materials – from steel to grains and coal – more expensive than Russian alternatives.
Tajikistan and Kyrgyzstan were most likely to suffer from the weaker tenge, BMI Research said in a note on Wednesday after Kazakhstan let the currency drop 4.5 percent ahead of the free float.
SEB said yesterday that Kyrgyzstan’s som, Turkmenistan’s manat and the Tajiki somoni were next in line. – Bloomberg