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Causes and Consequences of tenge devaluation
By Jean-Christophe Lermusiaux, Managing Director - Head of Research
April, 2009
On March 12th, AmCham welcomed Jean-Christophe Lermusiaux, Managing Director and Head of Research at Visor Capital, to a gathering of members at the Hyatt Hotel's Djambul Restaurant. The speaker, a recent addition to the Visor Capital team in Almaty, presented his company's views on the recent tenge devaluation and its impact on the macro economy and corporate earnings.
Jean-Christophe Lermusiaux,
Visor Capital
Mr. Lermusiaux came to Visor Capital with 11 years of sell-side banking experience in Paris and London. He was previously head of the IT Services and Software sector at BNP Paribas, prior to which he worked for Kepler Equities, BNP Equities and Oddo Equities, where he was involved in several IPOs and capital increases.
The speaker cited prospective investor questions largely directed at the stability of the tenge. While several factors led to the National Bank's decision, two specifically: preserving foreign reserves and managing recent devaluations in neighboring countries, were of paramount concern. Keeping foreign reserves at a level above 100% to money supply (M3) might have been an important psychological factor in the government's decision to devalue (M3-the broadest definition of money, is a key economic indicator used to forecast inflation). Pressure to devalue was also spurred by drops in industrial production, of 3.5 and 10.4% in December and January respectively. Monthly exports also fell by 44% in the second half of 2008. Given these factors, devaluation was becoming the government's best option.
The speaker stated the impact of the devaluation is being felt in two areas: corporate earnings and repayment of external debts. The weaker tenge has been clearly negative for banks (which have significant USD debt), slightly negative for companies with KZT revenues and moderate debt in foreign currencies and positive for the oil & gas and mining sectors (USD-based revenues, with part of production costs in KZT). Investors are also focusing on external debt payments of USD 20.1 billion (USD 11.1 billion in the banking sector) Kazakhstan faces in 2009. One the positive side, total foreign reserves (including the National Fund) fell only 1.0% in January (to USD 46.2 billion). So what will happen to tenge in the coming months? Mr. Lermusiaux cited both pros and cons to the devaluation. There are arguments on both sides to advocate for stabilization or further depreciation. One key determinant will be the world price of oil. At US$4045 per barrel, pressure on the tenge will persist, and investors should expect moderate depreciation. Although the country can easily cope in the short-run, it doesn't make much sense for Kazakhstan to spend a large proportion of its reserves to defend the currency. Visor estimates the likelihood of further depreciation, given current economic conditions, to be around 30%. The investment bank cites a higher probability in the tenge stabilizing within the range provided by the National Bank (KZT/USD 145-155).
The speaker also referred to Kazakhstan's other natural resources, notably in mining, as supporting economic recovery. Uranium, Copper, Oil and Gas are of great interest to China, and should Kazakhstan need further infusions of foreign currency, it could turn to China or other neighbouring countries for loans offset by oil and gas reserves or mining interests. However, he did not indicate that this necessity seemed of any urgency at the moment.
While default risk among companies with large foreign currency debt and a further decline in real estate prices is high, Visor Capital has expressed no real concern for the medium-term. Going forward, it believes that the government's stabilization measures will be adequate to buoy the economy - provided that they are implemented in a timely manner - and that fundamentals will continue to make Kazakhstan a healthy mid-term prospect.