Expecting the Devaluation
At the beginning of March Almaty city hosted the second annual summit for the financial directions – CFO Idea Exchange & Networking Event. It is expected that this year the possibility of another devaluation of the national currency will become the central topic of the discussions. This is because of the fact that all the objective conditions are in place, as agree the experts, participating in the discussion.
First, let us share few words about the event itself. Summit was originally intended as a discussion platform for financial officers from the large producing companies, initiated by insurance company Centras Insurance. However, since it covers not only the urgent financial issues, but also the social and political themes, the event attracts the attention of experts from many different areas. This year their number reached 350 people.
The principal message of this Summit: business shall be ready for the new challenges that will exist due to a difficult situation, in relation with the major political and economic shocks of 2014. Speakers and participants shared their opinions on the situation in Ukraine, decreasing the Russia’s rank, collapse of the rouble, joining the EEU by Kazakhstan, falling oil prices, pension reform and many other issues. However, perhaps the most lively discussion was around the tenge prospects, which had been the topic for a separate section named as “Devaluation of confidence in Kazakhstan. Treatment methods".
First step towards the debates was the report with very eloquent name "Expecting for Devaluation”, presented by Oraz Zhandossov, Head of Rakurs Economic Analysis Center and ex-Chairman of the National Bank. According to his opinion, in the present circumstances Kazakhstan just need another tenge devaluation, and sooner is better for the economy and business. Here's what he said verbatim: "16 years ago in the same situation, I thought that such a bad devaluation as the devaluation of April 4, 1999 will be the last one. Of course, looking forward, I could not imagine that in 16 years, the country with thousands of Bolashak programme graduates, holding the best positions, will be in the same position again. On the other hand, it is clear that the current situation is quite specific. It is a double blow, due to the low prices for oil and other commodities of our primary export and what we now call the geopolitical crisis. Obviously, it was difficult to predict, that as part of our integration, we will face the situation when our partner's currency is significantly depreciated compared to our currency. This didn’t happen during the last commodity crises, when the movement of currencies was more or less simultaneous".
However, when talking about the urgent devaluation, Mr Zhandossov proposed to use the experience gained back in 1999. He was referring to the transition to a free floating exchange rate of the national currency, which lasted from April to October of the same year, when the rate was re-fixed. “During these 16 years it was necessary to reach the exchange rate, that would be understandable for the businesses, based on some kind of reality, and not on the wishes. In my opinion there is no other way, except for transition to a free floating currency. Given the structure of our economy is not easy to resolve such issue. First because of the large flows of the foreign currency, coming into the country through the National Fund, which is, unfortunately, a rather conditional structure. It is practically impossible to know how exactly works the National Fund, on the basis of the current regulations. If the currency moves to a floating exchange rate, an indication of the inflows and outflows, passing through the National Fund, shall be available to all the market participants, and not just to the Government alone. The National Fund structure should be stronger, maybe it requires the constitutional measures. In my opinion, the transition to free tenge rate depends on the political will and motivation. We have come to another stress, without preparing for the transition to a floating exchange rate".
Speaking about the risks associated with delaying such a painful decision, Mr Zhandossov warned that if the market parity to the Russian rouble will not be restored, then there is a high probability that the additional demand, which the government intends to establish in the framework of the crisis control measures, will be quickly absorbed by the Russian import. "It is clear that we can’t close the borders as part of our integration... For the commodities, which are competing with the Russian goods, we lose the market in a very fast pace. Can it be offset through a system of state support, not only through the subsidies and loans, but other components of net costs, firstly, the salaries? In my opinion, until now the Government didn’t provide a comprehensive solution".
From Crisis to Another One
Immediately after Oraz Zhandossov’s speech, the discussion section was followed. It was moderated by Dossym Satpayev, Head of the “Risk Assessment Group". His first question was addressed to Serik Akhanov, Chairman of the Board of Association of Financiers of Kazakhstan (AFK): "If you were given an opportunity to assess the citizens’ confidence in the financial system of the country, what grade will you give to it?" – to which Mr. Akhanov replied rather in a vague manner. "I was showing various performance. First, I was a bad pupil, in the junior school I had average grade, and at the University I turned to an excellent student. Therefore, I believe that the society has the different evaluations. For example, as Chairman of the AFK Board, I would put five points, as a professor at the Turan University I’d better rate at four points, and as a reader of your interview-only three points.
Immediately after Oraz Zhandossov’s speech, the discussion section was followed. It was moderated by Dossym Satpayev, Head of the “Risk Assessment Group". His first question was addressed to Serik Akhanov, Chairman of the Board of Association of Financiers of Kazakhstan (AFK): "If you were given an opportunity to assess the citizens’ confidence in the financial system of the country, what grade will you give to it?" – to which Mr. Akhanov replied rather in a vague manner. "I was showing various performance. First, I was a bad pupil, in the junior school I had average grade, and at the University I turned to an excellent student. Therefore, I believe that the society has the different evaluations. For example, as Chairman of the AFK Board, I would put five points, as a professor at the Turan University I’d better rate at four points, and as a reader of your interview-only three points.
In turn, the Chairman of the Halyk Bank Board Umut Shayakhmetova, who also took part in the discussions, was clearly far from joking. She expressed a sharp criticism towards the policies of the National Bank: “The country has an artificial shortage of tenge liquidity. The regulators fear that the money will go to the currency market and will put pressure on the national currency rate. Therefore, a problem that could lead to a crisis of non-payments was also created. First, it is already happening between the legal entities: the banks won't lend to business, some companies do not pay to others, the salaries are not paid, the loans are not repaid to the second tier banks and etc. Secondly, the banks themselves have a liquidity crisis. And if the banking sector payments will stop, if the banks themselves will not be able to make payments, there will be a huge crisis in the country".
At this point, Oraz Zhandossov joined the discussion and he noticed that the most countries have passed through the financial crisis, while Kazakhstan seems to be the first country that is close to another crisis, not even being able to overcome the previous one.
Apparently, having assessed the economist’s sarcasm, the moderator asked him what he will do if once again he would became the Head of the National Bank. Mr Zhandossov put forward a few concrete proposals: "the National Bank should become a structure that focuses on its core function: implementation of monetary policies to guarantee low inflation and low inflation expectations. The banking regulation shall be taken from the sphere of the National Bank competencies and to withdraw the united pension fund, since the pensions don’t have anything to do with the National Bank".
When Tenge Will Collapse?
Returning the colleagues to the possible devaluation, Mr Satpayev jokingly remarked that the discussion on this topic reminds him the talks about the yeti: "everybody sees its footprint, but no one have seen him”. However, this opinion was opposed by Kanat Nurov, President of Aspandau Public Fund: "Everybody sees it, since this yeti is hungry and he is knocking on our door! We will have to make the devaluation. Just now we are losing time, and the economy is stagnating”.
In response, Dossym Satpayev suggested that the early presidential elections meant the delay in sharp weakening of the tenge exchange rate. At the same time, he noted that there are hardly any guarantees that devaluation will not take place immediately after the election of the Head of State, on April 26. In his turn, Mr. Zhandossov corrected the moderator’s forecast: after the inauguration, there's another important date in July (Nursultan Nazarbayev celebrates his 75 anniversary on July 6- editorial note), therefore, this date (April 26-editorial note) does not inspire any optimism. And yet, sooner is better, when it comes to the devaluation. Otherwise we will have the further losses.
Umut Shayakhmetova supported the ex-Head of the National Bank. In her view, the people are ready for a new currency depreciation. "Whatever mantras we read to ensure the stability, all the people have the dollar-denominated deposits, including the businesses and national companies. The decision on devaluation should be taken quickly, because the issue is very important-it is crucial for the gold and currency reserves, used to support the tenge rate. The fact that the National Bank now wants to ban the exchange offices and it will be possible to purchase the dollars only under certain contracts, will return us back for a decade. The population and the businesses understand it. Devaluation is expected. As if to assure that it will not happen, then we will further strengthen the mistrust in the system”.
The opinion, voiced by another discussion participant – Yuliya Yakupbayeva, the Deputy Head of the Board of the National Chamber of Entrepreneurs was different from the others. According to her, many entrepreneurs do not support devaluation, even though they are nearly bankrupt.
There Are Three Pillars
The second panel discussion "De-dollarization in Kazakhstan” turned to be also very interesting. Myth or reality. During this discussion, almost all the experts shared the opinion that the measures, proposed by the regulator and the Government are ineffective.
“We remind that recently the Government, together with the National Bank has developed a plan for 2015–2016 to reduce the dollar dependence. It has already been approved by the Board of the National Bank, and includes three key strategic directions". Firstly, the maintenance of macroeconomic stability; secondly, the development of non-cash payments and reduction of shadow traffic; third, to ensure the priority of the national currency against foreign one.
The first direction will be developped through the measures to diversify the economy and increase the local content in the production of goods, works and services. The second directin schedules to make the transactions with movable and immovable property via the non-cash payments.
With regard to the third direction, the plan provides, firstly, an increased guarantee on deposits in national currency – from 5 million to 10 million KZT and, secondly, the reduction of interest rate for the deposits in foreign currency – from 4% to 3% annualy. This includes providing the banks with tenge liquidity, recovery of the banking sector and putting the ban on placing the prices in foreign currencies.
The very idea of de-dollarization was called as a populist one and that it is far from reality. As noted by businessman Saken Seyfullin, the best thing we can do in the current conditions is to refuse from the illusions about the possibility of increasing the confidence in tenge. "We have the National Fund money kept in dollars. Th people keep their savings in dollars. Banks also give the loans in dollars. And all of them are right. At this point, I propose to remove the "de-dollarization" as a slogan, as our economy is based on the extractive industry and therefore, it depends on the import. And in the long run we will live with dollars everywhere".
In his opinion, it is necessary to extend the scope of tenge use. "I don't know, if we have now a crisis or not. We didn’t sort out the crisis of 2007 and we will probably suffer immediately of another one. And will the devaluation really help? I don't know of any businessman who works in the internal market and who makes the plans for devaluation. The thought that devaluation is unavoidable, makes you unable to plan. There is apathy in the business community. I am not afraid of the expenditure of the National Fund money. At the end of the day it was created to support the tenge rate and for any other situation. But I also agree: let the devaluation to happen".
In turn, Zhanat Kurmanov, President of Exchange Council at the Kazakhstan issue of the economy de-dollarization. "We import very much. We succeed in making our trade balance positive only by selling our natural resources. In this regard, the problem of de-dollarization is a matter of economic policy. While Kazakhstan did not establish its own production, import substitution and entrepreneurs support, we will not solve the issue of de-dollarization ".
Oraz Zhandossov was even more explicit, as he said that it was a wrong decision to begin implementation the de-dollarization plan with regulation of non-bank foreign exchange bureaus. The economist criticized the former head of the National Bank Grigory Marchenko: "Administrative measures will not resolve it (i.e. de-dollarization-editorial remark). Marchenko was doing nonsense, wishing to close the non-banking currency ezchanges. Now again the governmental dedollarization plan starts from the currency exchange regulation. It is an evident joke”. In his view, de-dollarization can be achieved only through the trust in the national currency, as technical measures are secondary.
Umut Shayahmetova again supported Oraz Zhandossov. At the same time, she was very critical towards the initiative of Olzhas Khudaibergenov, who proposed to reduce dollarisation through introduction of a public guarantee for the deposits in tenge and at the same time, to reduce gradually the interest for the dollar deposits from 4% to 1%. "There are also such ideas: let the state to guarantee the deposits in tenge and the state will make the compensations in case of devaluation from the National Fund. This is utopiс! I believe it is even the anti-national proposal. It is both physically and technically unfeasible. The most important thing is, again, the price issue. All on our reserves, the National Fund.
In general, the Summit was held at a high level both at organizational level and in terms of the level of the invited experts. As for the main impressions from the event, it was based on the perception that the expert community, financiers and entrepreneurs expect a new devaluation of the national currency in the coming months and therefore, they do not believe in the effectiveness of the actions, taken by the government and the regulator to dedollarize the economy.
Editorial
Table of contents
Expecting the Devaluation Editorial
Insurance. Market Irregularity Editorial
E-commerce: Why Mission Is Possible Editorial
Automotive industry. In a Steep Dive Svetlana Arbuzova
Second Five-Year Plan As Response to Crisis Sergey Gakhov
