Andrei Tsalyuk,
Informational agency of financial markets �IRBIS�
Almaty, May 24
(Specially for THE GLOBE)
In the last week the hard currency market visually demonstrated that unexpected events rarely happen. If the administrative pressure is small (it has been small since April 5), it is easy enough to estimate the near future. Sometimes it is difficult to name a concrete value of the exchange rate on a definite date. However, the total trend of the development of the events at, let�s say, a semi-quantitative level, is often clear. Let�s try to explain the events that occurred and to predict the future development with the help of the diagram presented in this article.
The last a month and a half
The first thing that is striking, is the rhythmic changes of the average exchange rate and the US dollars auction volume at KASE. The four �peaks� in the saw-like diagram are regular (one �peak� per 9 to 10 days). It is not just geometry. Between the �peaks� with a little shift to the right, the mass of tenge reached a critical point � approximately 7 billion. (This mass was issued by the National Bank on a non-emission basis, as a result of purchase of the exporters� dollars at KASE). We mean not the total monetary mass in the country, but only that part of it which was formed after the liberalisation of the exchange rate of Kazakhstan�s national currency. Until April 5 the tenge� mass was only reducing.
Each time this critical level was achieved, a significant activation of the second level banks in the hard currency market occurred. Banks received free means, which their client could not �eat� - leaving money in the accounts at definite interest rates as the deposits. Naturally, the banks directed this money to the hard currency sector to gain profits. The banks opened long position and after some time they fixed profits, and opened the positions again. People say: �money is circulating at the exchange�, but the economy did not feel it. The speculative component of the auction (the difference between the dollar�s gross and net turnover) increased abruptly, and the tenge fell faster.
At some moment, when the described process exceeded the reasonable limits, the National Bank interfered and sterilised the market effectively, though for a short period-of-time. �The tenge cushion� formed for the first three weeks, fell to 5 to 6 billion tenge, there was already financial hunger in the market, the second level banks stopped speculations and began to sell the dollar to maintain their short-term liquidity. As a result, while the demand for dollar was falling, the tenge temporarily strengthened.
Then everything repeated from the beginning.
Taking into consideration the above-mentioned mechanism, we may come to the three important conclusions.
First, the Kazakhstan economy is not yet able to utilise money (as was proven by the experience of the last month and a half). Thrice the efforts to increase the tenge cushion up to 7 billion led to the necessity to reduce it to 5 to 6 billion. One to two billion tenge could not positively enter the existing market.
The second thought is based upon an analysis of the tactics of the National Bank. The repeated efforts to increase the tenge�s mass indicates that the leading bank of the country really requires dollars, not the increasing monetary mass. It is most profitable for this bank to buy dollars from the exporters in the domestic market. The National Bank cannot buy at any price, as it has decided not to emit money. Consequently, the dollar is to grow at the same rate as it is profitable for the exporters and the National Bank, not for the currency dealers. The principle fact is, that we are not talking about the establishment of any �hard currency corridors� or barriers as it was before, but we are talking about a short-term deficit of tenge to be created in the market. In this condition of deficit, speculations will just cease.
The third conclusion is the most important one. It is an obvious statement: it is impossible to settle the problems of the sector of the real economy solely with the help of the dynamics of the exchange rate. At last, this thesis took a proper place in the speeches of the officials. Kazakhstan has strong monetarists, who have some definite achievements. Now it is time for industrial managers, not financial men to make their contribution. The situation in which the National Bank traditionally liquidates the consequences of any �industrial� conceptions of the government may be interesting from the analytical point of view, but the country does not gain any profit from this situation.
Let�s go back to the last three weeks - they had their own peculiarities.
The last three weeks
On May 5 the market received information that the obligatory sale of 50% of the exporters� hard currency revenues will be abandoned �in the next weeks.� After that, the banks tried to maximize the gain from their assets, by investing in the dollar. The annual tenge�s devaluation rate was 230.4 (within the period May 3 to 7), which was the maximum rate from spring of 1994. For four days the market became so overheated that it was followed by a deep fall of dollar�s rate. Banks invested everything that they could in dollars. But the banks work in Kazakhstan, not in America and tenge are still required. The consequence was the following: according to the results of the 20th week (May 10 to 16) the tenge began to strengthen. The cor. accounts of the banks only normalised by May 14. Demand was restored somehow, though it remained low. If the exporters� revenues had not been reduced, the current devaluation rate of tenge in the 21st week should have been lower. For the last seven days the average exchange rate was determined to be 71.9%.
Thus, the last (21st) calendar week (in the diagram the auction volumes of this week are marked with a darker colour) was a natural consequence of the 19th and 20th weeks.
The last week
First, representatives of the National bank quieted the market somehow, having announced that the leading bank of the country was not going to abandon the obligatory sale in the nearest future. �In the near future it could be abandoned, it is not a matter of tomorrow or a day after tomorrow, but within the next two to three months, maybe earlier,� Mr. Damitov said (quoted from REUTERS review). A week before that, the National Bank declared categorically enough, that it was against the abandonment of the obligatory sale, which is claimed by the Finance Ministry following the demands of IMF. As a result, the short-term devaluation expectancies fell, and that predetermined a growth in the demand for the short liabilities of the National Bank.
Secondly, in comparison with the previous week, the average volume of the auction at KASE decreased 1.5 times: from US$ 11.241 million to US$ 7.889 million. This happened due to a reduced supply of the exporters� hard currency revenues, the reasons of which are not known by the author. The most popular supposition � a seasonal factor � cannot be either refuted or confirmed. We may just remark that this reduction surprisingly coincided with a slow restoration of the purchasing capacity of the second level banks after they had been overheated in the 19th week.
Third, the National Bank has changed its �loan� tactics in the primary market of its liabilities, and to my mind, it is the most interesting event. Until the 21st week, the profitability of the notes was stable. From April 15 the annual profitability of the securities with the circulation period of 14 days was 18.33% (despite the conjuncture of the market), of the 21-days notes � 18.92%, of the 28-days notes � 18.99% (we mention only the most popular securities). The emitter worked by the �whatever they give� principle. In the analysed week, this situation changed principally. The profitability of the placed notes grew. But the most significant thing is, that the emitter satisfied practically all of the submitted applications, definitely demonstrating its desire to withdraw an extra mass of tenge from the financial market, or, at least, not to allow tenge to inflow from the SS sector. Recently this device was effectively used by the leading bank of the country. Then it was forgotten, most probably, under influence of the increasing negative balance of the program (they covered more than they managed to loan). Now the National Bank �remembered� this device. Hence we may come to conclusion, that from now onwards the National Bank may follow this method to regulate the hard currency market. The NB will offer banks the profitability of the short securities, thus satisfying their speculative demands in this sector of the market, as in the hard currency site only the NB will determine the situation. The result is that the gold and hard currency reserves will grow at the slower devaluation, while the �extra� tenge coming to the market will be invested by the banks to hard currency, not to the notes.
It is obvious that we should not interpret this scheme absolutely. Today the National Bank is not able to offer the second level banks an interesting rate of the notes. This rate should be so interesting that the banks will present at KASE only the obligatory orders of their clients. To achieve this aim, the profitability of the securities would need to be tripled, at a minimum. This is impossible given the budget of the National Bank, which is to be fulfilled as thoroughly as the State budget is fulfilled. Though efforts in this direction may somehow change the conjuncture of the hard currency auctions to reduce the demand and to slow the devaluation.
Future week
Thus, the prognosis for the future week is not simple. If there had been no suspicious reduction of the offer of dollars by the exporters (for it is not known what that will result in: whether the volumes will be restored or reduced under influence of the seasonal factor). If the tactics of the National Bank in the notes market had been the same, then we would have be able to suppose that we are at the threshold of the next temporary strengthening of tenge, which is to happen on Tuesday or Wednesday. It is proved by the rhythm of the market (see the diagram) and �tenge cushion� approaching the critical point (as on today it is 6.9 billion).
On the other hand, we have some time before it comes to 7.2 billion (that is the critical point), while the work of the banks at the exchange did not prove any deficit of money in their cor. accounts. In the evening of the last day of the week, three emissions of the note for the total amount of 1226.4 million tenge were reimbursed. The National Bank could not make this money return to place the notes on Friday, due to technical or organisational reasons (not due to conjuncture), it seems to the author. Consequently, this tenge will work at KASE on Monday, otherwise where may this money be spent? The possible reduction of the dollar�s supply also will promote the growth of the rate of the American currency.
Taking into consideration the above-mentioned facts, the author thinks that some strengthening of tenge in the next week is also possible - because there are no factors able to influence principally the current rhythm.
And further
In general it should be mentioned that the annual tenge�s devaluation trend (44.5%) today seems the most real one, if we talk about the trends of the month. I would like to increase these annual trends to 60%, something inside me persists on it. But they are steadily below 50%. The trader and analyst never disregard the situation, even if he cannot explain the reasons with the help of formulas of oscillators and by the analysis of the news. That is why let�s mention 48%. By the middle of July this index will result at KASE at approximately 122.5 tenge per unit. It will happen only if the obligatory sale of the hard currency revenues at the exchange will not be abandoned by that time. More long prognoses are unreal namely due to the obligatory sale. The abandonment of the obligatory sale is the factor that is bound to lead to principle changes of conjuncture in the hard currency market, and hence, to changes the trends of rate and rhythm.
However, that does not mean that the abandonment of the obligatory sale will unavoidably result in a fast devaluation of the tenge. The other factors and other regulating mechanisms will work.
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