Kazakhstan Pegs Tenge to Foreign Currency Basket

Kazakhstan Pegs Tenge to Foreign Currency Basket

Starting September 2nd, Kazakhstan will peg the tenge to a basket of foreign currencies, effectively ending the managed float that was put in place in March 2011. The basket will include the US dollar with 70% exposure, the euro with 20% exposure, and the Russian ruble with the remaining 10%.

This marks a change from using the US dollar exclusively as reference currency during Kazakhstan’s managed float. There are a number of reasons why this move is not too surprising, and most are tied to Kazakhstan’s trade trends.

Kazakhstan has urged its Customs Union partners Belarus and Russia to align their currency policies as the three countries move towards a common economic space. Because the three countries are closely integrated economically – and becoming more so, with the prospect of a joint currency not too far off  – it would be beneficial to adopt similar currency policies now to maintain a standardized regional zone with few unexpected currency swings.

Moreover, Kazakhstan’s economy relies heavily on an increasingly wider range of countries. In 2012, Kazakhstan’s top three trade partners were the European Union, China, and Russia, with the United States coming in seventh place. GDP forecasts for this year see growth at 6%, and that growth is expected to continue if the giant Kashagan oil field opens in 2014. Russia’s currency situation has remained fairly stable in the past few years because it also pegs the ruble to a foreign exchange currency basket to reflect trading patterns and commodity prices.

Oil, gas, and mining products are by far Kazakhstan’s most exported products, and the government has long stated a commitment to investing the country’s revenues to sustainably diversify the country’s economy. Like any economy dependent on natural resources for growth, Kazakhstan is heavily influenced by volatile commodity prices. It has made conscious efforts to implement its monetary, fiscal, and trade policies to avoid the so-called natural resource curse of over-reliance of extractive industries at the expense of non-resource industries.

Emerging markets use a variety of methods to stabilize their monetary policies, and currency baskets can be more stable since by tying its currency to a number of other, more stable currencies, a country can reduce the risk of overall currency exposure. Because Kazakhstan’s trade flows and trade partners are diversifying, it is not surprising that monetary policy reflects this progression. With an increased Chinese presence in Kazakhstan’s oil projects, the Chinese yuan is likely to become part of the currency basket in the future.

One factor not related to trade in the Central Bank’s decision is the US dollar. The dollar has strengthened over the past few months for several reasons, including positive US economic data and the situation in Syria, which has driven investors to the relative safety of the greenback.

Emerging economies could be hurt by the gradual ending of the US Federal Reserve’s stimulus plan. Already, a stronger dollar has helped weaken the Kazakh tenge, although the country’s Central Bank chair, Grigory Marchenko, has emphasized that there have been no grounds for a currency devaluation.

Managing the tenge is a way to soothe both investors and Kazakhstan’s citizens, and trying out new, more flexible methods is a way for Kazakhstan’s Central Bank to manage its trade environment. Particularly, this move could be indicative of Kazakhstan aligning with its Customs Union neighbors, as the three countries work to attract more partners and integrate more deeply.

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