Central Asia’s Currency Steppe Changes

Central Asian currencies entangled in Russian ruble and Chinese Yuan slides dipped to new lows against the dollar in August, as external bond investors took the signal to trim positions. The Kazakh tenge, Uzbek som and Tajik somoni fell 2-12% due to outsize Russian trade and remittance dependence. Kazakhstan is a member of the Moscow-led Eurasian Economic Union, and gets one-third of imports from its historic ally and neighbor. Tajik worker proceeds from there account for one-third of gross domestic product; for Uzbekistan the fraction is only 10%, but the central bank ended the foreign exchange fluctuation band during the month in another liberalization move drawing frontier market investor interest. China’s currency weakened amid the prolonged US tariff and technology restriction battle for additional sub-regional pressure, as foreign direct investment in natural resources and infrastructure gathers pace under the Belt and Road push.

In Kazakhstan, with new President Kasym-Zhomart Tokayev in office, panic buying prompted a documentation crackdown on customer and dealers as the tenge veered toward 400/dollar. It had stayed in a 375-385 range despite oil price weakness on presumed sovereign wealth fund intervention. Since the dollar peg’s collapse 5 years ago, a half dozen devaluations have hurt the population, which erupted in nationwide protest when snap elections were called in June. With double-digit unemployment and state banks still reeling from troubles originating a decade ago, a recent poll showed just 60% of citizens satisfied with living standards. To shake up the banking system the government intends to boost Islamic finance’s share, which now barely registers, to 3% over the medium term and may allow conventional lenders to open sharia-compliant arms. Next door Kyrgystan has a 5% goal, and Tajikistan and Uzbekistan are designing legal and regulatory frameworks with support from the Islamic Development Bank. According to Moody’s Ratings growth in this segment will strengthen and diversify funding sources, including from Asian hubs like Indonesia and Malaysia, but must link to existing deposit insurance and liquidity schemes to be competitive and sustainable.

Against the background of renewed currency jitters, Mongolia’s recent predicament of 25% depreciation and exhausted reserves before turning again to an International Monetary Fund rescue haunted portfolio managers, as bonds were dumped ahead of a heavy repayment schedule next year. Its August Article IV report predicts 5% plus growth over the next five years, but warns of the “narrow economic base” with mining 80% of exports and almost entirely destined for China. The OT copper project is half of foreign investment, with continued delays in coming fully on line. A $500 million swap line with a domestic bank and the bilateral Chinese central bank facility tapped for $1.8 billion expire in 2020, and large Eurobond amortizations start in 2021.The reserve position is projected to plateau then at $4 billion, but under a stress scenario could plummet to $1 billion as public debt hits 95% of GDP.

Years of double-digit household loan expansion have hurt bank capital and profitability and an asset quality review is not yet complete as the 2020 parliamentary election cycle approaches to further postpone action. Inflation is still high at 8%, amid chronic fiscal and current account deficits and worsening environmental damage to the key livestock industry. A budget rule was adopted but not enforced as the Development Bank runs up contingent liabilities, and retail borrowers circumvent macro-prudential debt service/income limits through resort to unregulated non-banks charging 40% interest, the review adds.

Investor qualms also touched hydrocarbon exporter Azerbaijan recovering from bank collapse and recession, despite selective appetite for its illiquid “exotic” bonds. The exchange rate is a de facto peg at 1.7 manat/dollar, after the SOFAZ sovereign wealth pool transferred billions of dollars in holdings for stabilization. Growth is expected at 2.5% and inflation 3.5% this year, as the fiscal stance moves from stimulus to consolidation, the IMF comments in a September Article IV survey. Monetary policy moved to inflation targeting, and structural reform strides are evident with a leap in the World Bank’s Doing Business rankings. However banking sector cleanup remains a work in progress after fraud and failure at leading state institution IBA, and corruption and transparency scores are poor. Local government bond development is also lacking until a durable shift in currency and capital markets confidence, the report cautions even high-risk speculative investors.  

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