February can be a spooky month for anyone with a pocketful of tenge. Kazakhstan’s embattled currency has been devalued twice in the last six years, both times in February. With plenty of indications the tenge is overvalued again, would-be investors are putting decisions on ice, distressed banks are reluctant to issue credit, and private citizens are hoarding dollars.
“Even an American couple would rather live in a yurt than take on a mortgage in Kazakhstan today,” goes a joke recently published on a popular online forum, accompanied by a photo of a western-looking, smiling couple in front of a felt-covered yurt, the traditional mobile home of nomads.
Kazakhstanis have learned the hard way about revaluations. In February 2009, their honeymoon with cheap credit came to an abrupt end when Kazakhstan’s National Bank devalued the tenge by 25 percent overnight. That made repayments on loans denominated in foreign currencies suddenly 25 percent more expensive. (By some estimates, about a third of loans are denominated in dollars.) Then the real estate bubble popped, further squeezing borrowers as they saw the value of their homes plunge.
The tenge took another hit on February 11, 2014, when the National Bank carried out another 19 percent devaluation, just as Russia’s ruble was starting to fall.
Non-performing retail and corporate loans now make up 23.55 percent of total loans nationwide, the central bank said in January. That places Kazakhstan among the more debt-distressed countries in the world.
With February here again, a cloud of anxiety is looming over struggling borrowers. “We are afraid of a new devaluation. Many of us will not be able to make it [after another devaluation],” Tatyana Alenkina, a volunteer at ONZ, a lobby group for distressed borrowers, told EurasiaNet.org.
Alenkina lost her Almaty apartment after she defaulted on a $35,000 loan in 2011.
Speculation about another impending devaluation has intensified as the Kazakh economy abruptly slows, hit by collapsing oil prices and the negative spillover from the troubles in Russia, Kazakhstan’s largest trading partner. The tenge’s relative strength against the plunging ruble hurts Kazakhstani exporters.
Kazakhstan’s growth rate declined from 6 percent in 2013 to 4.3 percent last year and could fall as low as 1.5 percent this year, according to official estimates.
Though the National Bank has repeatedly ruled out any “sharp” fluctuations in the currency, its governor, Kairat Kelimbetov, is widely scorned for insisting there would be no currency adjustment only weeks before the devaluation last year. And the National Bank again appears to be struggling to defend the tenge. Bankers in Almaty say the government has spent billions using opaque currency swaps with commercial banks that do not appear on official balance sheets. Officials have repeatedly refused to comment on the moves.
Individual and corporate savers are trying to hedge by converting their tenge savings into US dollars. The share of deposits in foreign currencies grew to 52 percent of the total (corporate and retail combined) at the end of November 2014, up from 37.2 percent a year earlier, according to National Bank figures.
The dollarization trend threatens to make tenge devaluation a self-fulfilling prophecy: people exchange their tenge into dollars because they expect another devaluation; by doing so, they decrease the demand for tenge, further weakening the currency and making the National Bank’s carefully managed exchange corridor unsustainable.
Banks are adjusting too. A number have stopped issuing mortgages in tenge, fearing they would end up on the wrong side of a deal after another devaluation. Most notably, Kazkommertsbank and the Kazakh subsidiary of Russian-owned Sberbank, two leading local lenders, have stopped issuing mortgages in tenge, their customer service call centers confirm. Representatives at both banks were not immediately available for comment.
Other majors such as Kaspi Bank, BTA Bank or Temir Bank have put their mortgage programs (both in tenge and dollars) on hold, customer service representatives confirm.
“Everyone is acting in this way due to the uncertainty about the possibility of a new devaluation,” Olzhas Khudaibergenov, a former advisor to National Bank Chairman Kelimbetov, told EurasiaNet.org.
A devaluation this February might be tough for Kazakhstan’s banking sector to handle. “If a sharp devaluation happens, it will create expectations for another one in February 2016, which would cause the interest rates on tenge loans to rise; or the banks will attempt to issue loans exclusively in dollars again,” Khudaibergenov said.
Many observers are arguing for a gradual, managed devaluation – about 6 percent a year – rather than a sharp, sudden cut. Prompting speculation that this is what the National Bank may do. In recent weeks, analysts point out, the tenge has been moving toward the lower edge of its corridor. Also, abandoning exchange rate targeting is an official policy goal for the medium term.
Khudaibergenov argues that a gradual devaluation would boost confidence in the currency and take some pressure off the National Bank and its reserves. Then perhaps even the American couple would take out a mortgage for a city dwelling and reserve the yurt only for weekend getaways.
Kanat Shaku contributed research for this article.