Kazakhstan macro: A vicious circle not yet broken

KAZAKHSTAN - Report 06 Nov 2023 by Evgeny Gavrilenkov

The excessively strong tenge was one of the main reasons for the widening republican budget deficit in 9M23. Another reason for the wider deficit was the amended expenditures—along with the assumption that the revenue would grow as much as the additional spending. As the latter has not yet happened, the government had nothing to do but transfer cash from the National Fund ahead of plan, i.e., in more sizeable amounts than it assumed initially. This meant selling FX on the market, which affected the tenge’s exchange rate, especially in recent weeks, as the Kazakh currency appreciated well below USD/KZT 470. The tenge moved to USD/KZT 463 as of November 6, approaching the same level as early in the year (USD/KZT 463 on January 3).

In recent months, the amount of FX sales from the National Fund soared, reaching historical records ($1.512 bn in October). The National Bank of Kazakhstan reported that the government needs to sell from $1.3 bn to $1.4 bn this month to secure smooth budgetary financing. This includes the government's needing some additional cash to buy shares of KazMunayGas company, as the NBK reported. It looks as though in December, the government will need a somewhat similar amount.
These record amounts of FX sales by the government distort the market and cause the tenge to appreciate. The NBK reported that the government operation on the FX market accounted in October for 47% of the total market turnover, which reached $3.2 bn. Hence, a vicious circle is in place—more FX sales by the government on the market leads to a stronger tenge, and the latter reduces tax revenues associated with the exchange rate. Therefore, more FX sales will be required to secure financing of the 2023 amended expenditures.

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