Central Asia’s Adjacent Agitation Angle
Central Asia and Caucuses markets with close ties were whipsawed by currency and securities selloffs in Russia and Turkey the past month, with the former less severe and mainly due to heightened Western sanctions odds rather than economic policy miscues. Azerbaijan, Kazakhstan and Georgia with internationally traded bonds and stocks suffered damage from the respective lira and ruble declines around 40% and 15% against the dollar this year. Ankara has no formal grouping like the Moscow-led Eurasia Economic Union with a common external tariff, but established a Baku-Tbilisi-Kars rail connection and spearheaded a trade and investment campaign with the “Stans,” including recently opened Uzbekistan after longtime ruler Islam Karimov’s death.
Turkey’s central bank against President Tayip Erdogan’s wishes hiked benchmark interest rates 6% to stem collapse, while Russia, with budget and current account surpluses and $450 billion in foreign reserves, has not been as concerned about the biggest depreciation since 2016. Russian stocks lost 5% through August compared with Turkey’s 55%, but its local and external bonds were walloped on reports the US Treasury Department may consider stricter asset manager bans under new congressional legislation. Sovereign wealth funds in Azerbaijan and Kazakhstan likely have them in their portfolios as well, but the cross-border fallout was further reaching and mixed with existing banking system, commodity and competitive pressures.
Kazakhstan’s MSCI frontier index component was down only 3% against the composite 15% drop through August, but the currency plunged to 380/dollar into September, around the record low since previous devaluation and flotation. The 15% tenge slide so far this year is in line with the ruble, but local speculators, with their own “carry trade” into high-yield bank deposits, and opposition political parties warning of a crash were also blamed. Analysts argue it has long been overvalued and should be in the 420 range, and that hydrocarbon and mining export seasonality will bring final quarter appreciation. First half gross domestic product growth was 4% on rising oil prices despite construction and services weakness, with inflation at 6% and the current account in slight deficit. International reserves were $90 billion, with $50 billion in the stabilization fund that can be tapped for exchange rate intervention.
Before the latest tenge scare, the capital Astana celebrated its 20th anniversary and President Nursultan Nazarbaev’s birthday in July with a grand party, where provincial officials offered an estimated $20 million in gifts. Around the same time the state telecoms operator took over the Nordic and Turkish-owned mobile phone leader, a transaction giving it a two-thirds industry share and spooking foreign investors. Critics claim it will hurt competition and new technology and alienate potential buyers, as big government companies are to sell partial stakes on the stock exchange in the coming months. The International Monetary Fund in turn in its September Article IV report called attention to remaining major bank “challenges and risks,” despite billions of dollars in support including for a merger of the top two lenders. The next ranking institution Tsesnabank disclosed a 30% liquid asset decrease, as officials agreed to purchase a 1 billion euro agricultural credit portfolio while the central bank injected another 350 million euros. Its management was reshuffled with the chief executive ousted, and rival Eurasian Bank with almost $3 billion in assets likewise announced a liquidity squeeze. Private sector credit growth has tentatively resumed at a 10% pace, in part driven by the President’s “7-20-25” discount mortgage program unveiled in March, but these rescues reflect IMF views that bad debt resolution and business model overhaul are still lacking.
Azerbaijan’s thinly-traded sovereign debt was unnerved by dual Turkish and Russian economy exposure, and Pasha Bank has an Istanbul subsidiary which issued $25 million in its own bonds this June. GDP growth and consumer inflation are running at 1.5% and 3% respectively, and a strong current account surplus and foreign direct investment inflows continue to back the new dollar exchange rate peg. However the central bank is carefully monitoring local saver dollarization preference, with the deposit ratio currently at 70%, as well as frequent private sector hard currency borrowing. The state oil company has $20 billion in investments in Turkey ravaged by the lira’s meltdown, which will likewise dent tourism numbers into neighboring Georgia that had increased 20% annually, and bleed into external bond prices.
