Tenge plunges by record 23% in shift to free float

    By Nariman Gizitdinov
    Kazakhstan’s tenge plunged a record 23 percent after the country relinquished control of its exchange rate, becoming the latest emerging market to abandon efforts to prop up its currency before the US raises interest rates.
    The country has switched to a free float and will pursue an inflation-targeting monetary policy, Prime Minister Karim Massimov told a government meeting in Astana. Supply and demand will determine the exchange rate, central bank Governor Kairat Kelimbetov said, adding that there will only be intervention if stability is threatened. The tenge sank to an all-time low of 256.98 per dollar in Almaty, data compiled by Bloomberg show.
    Central Asia’s biggest crude exporter is contending with sliding oil prices and weakening economic growth in China and Russia, its top trading partners. Most emerging-market currencies depreciated this month as China devalued the yuan and speculation of a Federal Reserve interest-rate increase spurred capital outflows.
    “It’s a move to prepare for the Fed rate hike,” said Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong Ltd. “In anticipation of higher US interest rates, some emerging-market countries are opting to let their currencies weaken to stimulate exports and avoid massive intervention.”
    Vietnam devalued its currency on Wednesday for the third time this year after a similar move in China last week triggered the yuan’s steepest slide in two decades. Russia is allowing the ruble to track the drop in crude, which has tumbled 58 percent over the past year to $40.58 a barrel in New York. The yuan weakened 3.9 percent versus the dollar in that time and the ruble sank 46 percent.
    ‘Correct’ Imbalances
    The tenge should stabilize in five to seven days, Kelimbetov said, adding that the central bank is not targeting any particular exchange rate. Nomura Holdings Inc. said in an Aug. 12 note the currency would need to weaken to between 235 and 268 per dollar to “correct” imbalances due to the slide in commodity prices and the overvaluation of the real effective exchange rate.
    Kazakhstan’s shift to a free float “will create the necessary conditions for a recovery of economic growth, increased lending and investment activity, creation of new jobs and a decrease in the inflation rate to between 3 percent and 4 percent in the medium term,” Prime Minister Massimov said.
    The nation’s gross domestic product is set for a 1.5 percent increase this year, the smallest gain since 2009, according to the median estimate in a Bloomberg survey conducted before the exchange rate was freed. The economy grew 4.3 percent in 2014.
    The inflation rate was 3.9 percent in July, down from 7.4 percent in December, according to Bloomberg.