The concerns over slowdown in the Global economy had a negative impact on the global risk sentiment of investors in June. NBK Deputy Governor Aliya Moldabekova commented how this affected tenge and the international reserves.

 

– What were the key events to effect on the Global markets last month?

– The debates regarding the Global recession risks had a dominant influence over financial markets in June. Thus, in June, an increase in the Global PMI up to 53.2 points was recorded due to a major recovery in China after the Covid-19 restrictions. However, slowdown was reported in the EU and the US: in the US, the Manufacturing PMI fell down to 52.7 reaching a two-year low. The Eurozone reported a large decline in services by 3.1 points to 53 points.

The increase in the US Fed rate in June by 75 basis points, up to 1.5–1.75%, against the background of data on reaching a 40-year high inflation (8.6% in May) supported the US Dollar on the global currency market. The US Dollar Index, DXY, in mid-June rose up to a 20-year high, having gained 2.9% at the end of the month. This is certainly putting pressure on the EM currencies. The EM currency index lost 2.2% over the month.

Thus, in the conditions of ongoing geopolitical conflict, high inflation, monetary tightening by central banks and exacerbating concerns of global recession, negative risk sentiment in June surged. Volatility indicators remain elevated. As a result, dynamics of the stock market in June was negative. MSCI World Global Equity Index dropped by substantial 8.8%. In general, the first half of 2022 was disadvantageous for the global stock market, which declined by almost 20%.

Oil prices in June were also affected by the concerns over the risks of global recession and a likely decrease in demand for energy resources. Based on June results, price for Brent crude oil went down by 6.5%.

In early July, oil price fluctuates within USD 105–107 per barrel as a result of partial introduction of new quarantine restrictions in China against the background of a new wave of infection.

– Ms. Moldabekova, what was the reason behind tenge depreciation in June? Did the National Bank conduct any operations on the foreign exchange market?

– Indeed, in June, tenge depreciated to make 470.24 KZT/ USD, which is by 13.3%. The reason for such market sentiment was both external and internal factors. First of all, it is important to indicate the Global appreciation of the USD which I spoke about earlier.

The internal factors include increased demand for foreign currency from legal entities during the dividend payment period and a decreased supply of foreign currency due to reduced sales to pay taxes by exporters.

The supply side of the foreign exchange market received support from sale of foreign exchange earnings by companies in the quasi-public sector, which made around USD 480.4 million, and sale of foreign currency to ensure transfers from the National Fund to the republican budget.

During June, National Bank did not carry out foreign exchange interventions on the domestic foreign exchange market. Sentiment and market volatility were in line with the market situation. I would point out that in the floating exchange rate regime, volatility of tenge is considered a normal situation.

– Due to high volatility in the foreign exchange market, a question of getting back a fixed exchange rate continually occurs. What do you think about this?

– Based on past experiences, the policy of fixed exchange rate creates illusion of short-term stability, which can be artificially maintained for a long time only by spending gold and foreign exchange reserves, which ultimately may result in devaluation the national currency.

Free float regime of tenge, in turn, allows to immediately respond to developments in the external environment. This prevents accumulation of imbalances in the economy, and also contributes to preservation of gold and foreign exchange reserves of the country. Therefore, National Bank does not consider the issue of transition to the fixed rate regime.

– In recent months, banks have faced an accumulation of Russian ruble in cash. What measures has the National Bank taken to resolve this situation?

– In March 2022, the Head of State signed a decree that restricts withdrawal of foreign currency in cash from the country exceeding USD 10,000. This measure has allowed to ease the pressure of speculative demand for foreign currency in cash and mitigate the risks of removing foreign currency from the country. Similar measures have been taken by neighboring countries in the region to ensure stable operation of the domestic financial systems.

Along with that, due to tight trade relations between Kazakhstan and the Russian Federation, Russian ruble in cash have been accumulated in Kazakhstani banks following the cash foreign currency withdrawal restrictions. This was mainly affected by such factors as a significant volume of border trade, as well as free movement by citizens of the EAEU member countries for tourism and other purposes within the Union.

National Bank of Kazakhstan together with the Government in order to resolve the issue of accumulated rubles, suggested the amendments to the Presidential Decree to allow a one-time export of cash rubles for second-tier banks. Thus, in line with the draft Government Decree it is planned to allow export of cash Russian rubles during the period from effective date until August 31, 2022, to the extent of volume accumulated cash in bank as of July 1, 2022.

We understand that a one-time export may appear to be an interim measure which does not solve the problem of accumulation of the cash Russian rubles in Kazakhstani banks. The issue of a complete abolishment of the cash rubles’ withdrawal by banks may be considered as soon as analysis of trade flows has been carried out, and the situation levels off.

– How have gold and foreign exchange reserves changed over the past month?

– During June, the volume of gold and foreign exchange reserves decreased by USD 800 million and totaled USD 32 billion.

In June, against the background of appreciation of the US Dollar, gold price fell by 2.2%, from USD 1,854.4 to USD1,813.6 per ounce, which resulted in a decrease of the gold portfolio. Besides, reduction in the gold reserves was affected by an outflow of client funds from foreign currency accounts with the National Bank.

– How did the volume of foreign exchange assets of the National Fund change in June, and what factors influenced it?

– According to the preliminary data, the volume of foreign exchange assets of the National Fund made USD 51.9 billion in June, with a USD 2 billion decrease over the past month.

Reduction of assets of the National Fund is attributed to a significant drop in stock prices and appreciation of US Dollar. Also, allocation of transfers from the National Fund to the republican budget influenced the decrease in assets of the National Fund.

The volume of transfers in June amounted to 578 billion tenge. A significant part of the transfers was allocated at the expense of balances in tenge account of the National Fund, as well as the tenge inflows to the National Fund. Moreover, the assets worth USD 438 million, an equivalent to 199 billion tenge, were sold on the domestic foreign exchange market. Sales from the National Fund accounted for 20.7% of the total volume of foreign exchange trading on the Kazakhstan Stock Exchange.

It is necessary to indicate that in an effort to suppress the accelerating inflation central banks have turned to major rate hikes over the past two decades. Against the background of high geopolitical risks and Fed’s rhetoric about its readiness to act more aggressively to curb inflation, the stock market has sustained a significant drop for the past month. Meanwhile, the long-term profitability of the National Fund since its establishment has made 3.05% per annum.

– What are the prospects for development of situation on global markets?

– Data related to business activity in June revealed that the developed countries run into challenges of economic slowdown, which may appear even more serious than those of the emerging countries, therefore investors have a lot of reasons to remain cautious. The upcoming PMI data could be an early barometer to evaluate a growth pace of the global economy.

On the energy market, oil prices hit multi-year highs this year amid the risks of supply cuts due to the geopolitical conflict. In the meantime, the analysts in investment firms try to predict an oil trajectory by the year-end amid rising interest rates and exacerbating recession risks. The range of forecast levels is quite wide. Goldman Sachs forecasts that global oil prices will hit $130 per barrel by the end of this year amid resuming international travels and a recovering demand in China. At the same time, Citigroup analysts forecast that the oil prices will decline to $85 per barrel due to the recession risk. Median consensus, according to Bloomberg, is around $97 per barrel.

In order to curb inflation, the US Fed will follow its hawkish monetary policy. According to the June meeting minutes, the Committee Members signaled their readiness to hike rate by 50–75 basis points at the next meeting in July. Aggressive tightening of the monetary policy increases the recession risks in the US, although the probability of negative GDP in the US next year, according to Goldman Sachs, remains as low as 30% (for comparison, 40% in the EU, 45% in the UK). In general, both factors (rate hike and global recession) can potentially have a favorable impact on the US dollar index.

It is also necessary to indicate that the sources of recession risks in the largest economies of the world, particularly the Eurozone and the United States, have their own characteristics. While the main source of risk in the US could be a short-term decline in purchasing power and consumer demand caused by shifting of price increases by producers to consumers, in the Eurozone, recession might be caused by the geopolitical situation representing a more sustained crisis against the background of interruptions in energy supplies.

Uncertainty associated with increased concerns about possible recession in the euro area is largely reflected in a continued trend of euro depreciation on the foreign exchange market. Thus, on July 11, euro exchange rate against the USD reached parity for the first time since 2002.

Source: Kapital.kz