How will the fall in the ruble affect the tenge? | FinReview
14 September 2020

How will the fall in the ruble affect the tenge?

Russian economists predict that the ruble will be devalued in September-October. The weakening of the nearest neighbor’s currency carries risks of negative dynamics of the tenge. How will the exchange rate of our currency change and how can the state stimulate the strengthening of the tenge?

The weakening of the Russian ruble in recent weeks provoked rumors of a new devaluation. Since the beginning of the year, the ruble has weakened by 21%, being in the group of the most affected currencies along with the Turkish Lira, the Brazilian real and the South African Rand. And on the eve of the Internet space appeared contradictory forecasts about the fate of the Russian ruble-some experts predict its temporary strengthening, while others allow the disconnection of Russian banks from settlements in dollars.

The potential weakening of the Russian currency as one of the main trading partners of Kazakhstan carries risks of negative dynamics for the tenge. How the tenge exchange rate will change in the future, analysts analyzed

What are the risks and conditions associated with the devaluation of the ruble?

The most obvious factor is the post — pandemic period. It is possible that the second wave of infection will be avoided and the need to re-introduce restrictive measures will not arise. However, another case is also possible — if Asia and Europe are covered by the second wave,and then Russia. This will lead to the introduction of new stabilizing measures within the country, which may significantly slow down the recovery of economic activity.

The next risk is a possible deterioration of the situation in the oil market. Currently, oil pricing still depends on the implementation by exporting countries of the agreements reached within the framework of OPEC+. If they are violated, the price of Brent may fall to 35-40 US dollars per barrel, which in turn will weaken the ruble.

The third risk is the reduction of the base rate by the Central Bank of Russia to a historic low of 4.25%. This usually leads to an increase in the money supply in free circulation in the economy, due to a decrease in the profitability of deposits and an increase in the availability of loans. This means that more money will be spent on purchasing goods and services. In other words, the ruble is becoming more popular within the country, but its attractiveness for investors is decreasing, as the differential with the currencies of developed countries is narrowing.

The fourth threat is the continuing risk of introduction of new sanctions against Russia, and this had a good effect on the currency.

Already, the Russian currency has turned out to be the most volatile in the “big twenty”

It is the threat of new sanctions in the context of Russia’s floating exchange rate policy that has increased the ruble’s volatility. Therefore, forecasts for its change to the US dollar should take into account the risks of introducing new sanctions measures. Some analysts believe that anti-Russian sanctions will not be imposed until the end of the USA presidential election. Accordingly, the ruble may temporarily strengthen its position. Approximately its exchange rate against the US dollar may increase by 7% and reach the level of 70 rubles.

However, if the sanctions are still adopted, the threat of being completely cut off from the ability to make payments in US dollars will increase for Russian banks. This is due to the USA bills introduced in 2018 on restrictions for the Russian banking system. The measures were meant to hit the eight largest state-owned banks. This is the threat that economists attribute to the Central Bank’s build-up of gold reserves. Over the past six years, gold reserves in Russia have grown by 120%, reaching 2.3 thousand tons.

Nevertheless, in April 2020, the regulator suspended the purchase of gold in order to cover the shortage of petrodollars with revenues from its exports. The government began issuing General licenses to miners, opening the way for the export of all the precious metal produced in the country.

But against this background, the ruble continued to lose its liquidity — as of the end of August, the Russian currency was oversold in the country. The reason for this was a number of factors: increased uncertainty in the geopolitical sphere, a deterioration in the balance of payments account, a decrease in the attractiveness of Federal loan bonds for non-residents, and the activation of import and outbound tourism after the lifting of quarantine measures.

However, predicting an increase in oil prices, some analysts still hold the position of strengthening the ruble. This is primarily due to the events in the capital of Lebanon and the release of estimates by the American petroleum Institute, which States that hydrocarbon reserves in the United States decreased by 9.4 million barrels.

Most likely, the price of oil will not grow, and the average price will remain at the level of 42.75 US dollars per barrel until the end of the year

This is due to the fact that oil production is also growing after consumption. OPEC+ countries agreed in the spring to reduce production, which was valid until July 1. That is, in the following months, they began to gradually ease the restrictive measures, increasing production in proportion to demand.

Now the oil market has almost stabilized — after a critical increase in global oil reserves by 6.4 million barrels per day in the first half of 2020, market overstocking has declined and in the second half of the year it is expected to decrease by 4.2 million barrels per day.

Of course, over time, the price of oil may return to 60 US dollars per barrel, but this will happen progressively. Current quotes on the market are a kind of consensus of importers and oil producers. Thus, in the context of the global economic downturn, countries need cheap hydrocarbons, which are a vital source of energy. At the same time, too expensive oil will slow down economic growth, and too cheap oil will be unprofitable for oil producers. Therefore, the equilibrium value that satisfies both importers and exporters is 40-60 US dollars per barrel.

Thus, oil prices will remain stable until the end of the year. This means that the hydrocarbon market will not ensure the strengthening of the ruble, on the contrary, the Russian economy is losing gold reserves, covering the shortage of petrodollars.

Economists predict that by the end of the year, the ruble will reach 80-85 rubles per dollar

Now it is quite difficult to predict how much the ruble will be devalued, since the degree of pressure of these factors on the currency depends on their scale. However, it is already clear that by the end of the year, the Russian currency will weaken its position to 80-85 rubles per US dollar. And in case of repeated deterioration of the epidemiological situation and the next introduction of major anti-Russian sanctions measures, it is possible to reach the level of 90 rubles per US dollar.

Does the tenge devalue after the ruble?

Many Kazakhstanis are concerned about what exactly will happen to the tenge in the future. After all, information about the potential linking of the tenge to the ruble often appears on the web, which provokes discussion about the upcoming fall of our currency after the Russian one.
Currency pegging means that the tenge should have the same value and stability as the ruble. Of course, the Russian currency has an impact on the tenge, as Russia is one of the main trading partners of Kazakhstan. However, there is no currency binding in fact, since the ruble has weakened by 21% against the us dollar since the beginning of the year, and the tenge by 11.4%. At the same time, the exchange rate of our currency against the Russian one varied from 5.3 to 6.2 tenge per ruble. In other words, such a significant spread of parity indicates that the ruble is not the only prevailing factor affecting the tenge exchange rate.

Our exchange rate is formed from local and external factors, including the movement of oil prices, the dynamics of foreign investment inflows and the situation with the spread of coronavirus infection. Accordingly, given the stabilization of these factors, we can also talk about the stability of the tenge exchange rate, which will be in the range from 410 to 430 tenge per US dollar until the end of the year.

Kazakhstan’s currency may strengthen its position

The strengthening of the Kazakh currency is possible if the financial market recovers and the growth of real sectors of the economy resumes. It is obvious that by the end of the year, the price of oil will not return to the previous level of 60 US dollars per barrel, which means that Kazakhstan urgently needs to develop non-resource sectors of the economy, and in particular, SMEs.

However, during the crisis period, the state cannot afford to subsidize the economy on a large scale, because these funds are necessary for the recovery of the market. Therefore, there is a special need to attract foreign capital. But the trend of recent months shows a 40% decline in global investment flows in 2020.

In other words, countries will start a race for investment. And in this matter, Kazakhstan has an undoubted advantage in the form of the Astana International Financial Centre.

Within two years of its official operation, the financial centre has attracted the attention of foreign companies — according to the latest data, 545 companies from 42 countries have become participants in the AIFC. In total, the participants of the financial centre invested 444 million US dollars in Kazakhstan’s sectors such as financial technology development, construction, agriculture and manufacturing. At the same time, investors intend to continue investing in the economy of Kazakhstan, and the volume of investment revenues in the near future may grow to 3.5 billion US dollars.

The financial centre also develops portfolio investments that can stimulate economic growth without giving investors the opportunity to manage an enterprise or project. Already through the Astana International Exchange (AIX), the volume of attracted capital reached about 4.6 billion US dollars.

Thus, in a short time, the AIFC not only developed the necessary infrastructure for integration into the global financial system, but also achieved investor confidence. Its further development will contribute to the growth of the economy, strengthen the financial sector and, as a result, lead to the strengthening of the tenge exchange rate.