Kazakhstan ready to float its currency

Kazakhstan is about to take another step on the path to becoming a recognized mainstream economy by removing restrictions on its currency, the tenge. The country plans to make the tenge fully convertible in January.

“On January 1 the free flow of capital will be allowed, another step towards the tenge becoming fully convertible later,” says Arken Arystanov, chairman of the Regional Financial Centre of Almaty. The RFCA believes that the tenge’s float will assist corporates particularly, with oil companies expected to open accounts abroad to decrease onshore risks. Changes will also mean that the special licensing requirements needed to trade tenge will be removed, which is said to be attracting considerable interest among international banks. Goldman Sachs is among those believed to be looking at the opportunities that trading the currency presents. January’s changes in licensing mean it will only have to register before it starts.

But, despite the looming free float, there is uncertainty about how currency trading will develop in Kazakhstan. “Though the tenge officially becomes convertible in January, no one really knows the effects it will have. We have seen drafts but there are still questions that need answering,” says Slava Alexanian, treasurer for Citigroup in Almaty, Kazakhstan.

Analysts feel there is a need for Kazakhstan’s central bank, the National Bank of Kazakhstan, to clarify its position. For instance, although intervention in the currency market is contrary to its guidelines, it took steps to halt the tenge’s appreciation in mid-2006 by buying dollars. Furthermore, the central bank appears caught between its desire to keep the currency competitive and the management of the massive foreign direct investment that is pouring into the country.

In November 2006 the IMF advised Kazakhstan to increase its interest rates to counter the country’s above forecast inflation rate and to keep growth within the previously predicted range of 7% to 9%. But even though inflation rose above the forecast of 6% to 8% in November to 8.5%, so far there has been no rate increase. The view is that this will not happen, because such a move is seen as boosting the currency before the central bank is ready.

Still, analysts are predicting a rate increase early in 2007. Interest rates are reportedly close to those in the US, so the motivation to own the currency is not based on yield and positive carry. The tenge is seen as being basically bid. “I think people will want long tenge positions as we strongly believe it will start appreciating again. Many people have long dollar positions at the moment. But, as soon as they get the nod from the national bank, they are likely to shift to long positions on the tenge,” says Alexanian.

Since September 2006 the tenge has traded closely around 128 to the dollar. However, this stability came after the central bank took steps to weaken it after it had moved from 132 to 117. Michael Sauer, chief executive of Visor Capital, an investment bank in Almaty, agrees with Alexanian’s view of which way the tenge is going: “Despite tenge depreciation since August, I think the trend will reverse back soon and it will appreciate again in the short term. All the fundamentals are in place for this shift,” he says.

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