Fixed Income. Kazakhstan Local Rates - Passing Through Choppy Waters

Recent weeks have been challenging for the tenge, with headwinds coming from concerns over a new coronavirus strain and the subsequent drop in oil prices, intensified sanctions rhetoric directed at Russia and the sharp depreciation of the Turkish lira. That led to a $690 mln outflow of foreign money from tenge-denominated assets in November, one of the largest monthly outflows in recent times, and a doubling in demand for hard currency from locals, according to the NBK. The regulator even had to resort to FX interventions for the first time since October 2020. While we assume the tenge will recover a bit versus the dollar in the near term, the balance in the FX market still seems fragile. > Tenge: Waiting for relief. Easing geopolitical tensions should help the ruble recover in December, which should help bring the tenge back to 430 to the dollar. We see the tenge appreciating to 415 next year, though it will likely continue weakening versus the ruble. > Pension fund flows: Pension savings portfolio keeps growing, supporting demand for local government bonds. Overall savings in the United Accumulative Pension Fund grew for the sixth straight month in October. We expect this pattern to persist in the coming months, as roughly 60% of funds eligible for early withdrawal have already been pulled, and also given the government's plans to raise the minimal thresholds for individual pension savings. Meanwhile, the UAPF continued increasing its purchases of local government bonds in October.> Macro: NBK keeps rates on hold in December amid positive signs on inflation and Omicron, but retains hawkish rhetoric. Considering that global inflation and commodity prices will likely remain high at least until the end of 1Q22, we see a high probability of another hike by the NBK next year. However, the hike should be limited to 25-50 bps, and the regulator could start the easing cycle as soon as 2H22, cutting the base rate to 9.00% by the end of the year.> Domestic developments: Minimum pension savings thresholds to rise; discussions over fiscal rule continue. Following its decision to hike the minimum wage on January 1, the government decided to raise the minimum thresholds for pension savings, which govern how much individuals can spend under the early withdrawal program. It initially planned to raise the thresholds on the same day, but implementation was pushed back to April 1 due to public pushback. On a parallel track, the government continues to discuss the proposed fiscal rule and expects it to be incorporated into next year's budget law. That would be positive for Kazakh debt next year.