TOPIC OF THE WEEK: Mild currency pressures to extend into 2024
In the last CCA Weekly for the year, we update our currency view on the region. Back in June, when most currencies were, in our view, at their peak vis-à-vis the US$, we argued that macroeconomic fundamentals, including moderating remittances from Russia and worsening external positions driven by strong economic growth, would be consistent with mild depreciation pressures in the second half of the year. This conjecture has panned out, albeit to a different degree for individual currencies.
Looking into 2024, we posit that internal economic dynamics may be less negative for domestic currencies as current account positions are forecast to remain broadly unchanged, with the main deterioration of external positions taking place in 2023. Moreover, as we outlined in our 2024 CCA Outlook, we expect growth prospects to remain reasonably positive. On the other hand, all CCA central banks have now transitioned into easing, and as monetary policy normalization continues into 2024, the interest rate parity condition will work against domestic currencies.
Our analysis also points to a moderate degree of overvaluation for most CCA currencies, except for the Kyrgyzstani som. In particular, we find that the Armenian dram and Georgian lari are about 14 percent overvalued, while the Azerbaijani manat is about 9 percent overvalued relative to their longer-term averages. The overvaluation for the Kyrgyzstani som is larger at 26 percent, while the Kazakhstani tenge and Tajikistani somoni are roughly in line with underlying fundamentals.
On balance, we see the second-half of 2023 trend of only mild downward pressure on domestic currencies extending into 2024, including because of our view that regional geopolitics may turn out to be less negative than generally expected. Azerbaijan and Uzbekistan have their distinctive stories related to the fixed exchange rate regime in the former and the relative price adjustments in the latter, which should generate our estimated 10 percent annual devaluation for the Uzbekistani sum. We see the rest of the currencies fitting within that zero-to-10 percent depreciation range in 2024.
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