Fixed Income. Kazakhstan Local Rates - Tenge to Stay Solid as a Rock

The highlight of September has been the remarkable stability of the tenge - its one-month realized volatility has dropped to the lowest level since the transition to a freely floating exchange rate in 2015. Meanwhile, Brent in tenge terms has hit new historical highs. Taking into account the continued uptrend in global commodity prices, our upbeat view on the ruble and the improving seasonality for the tenge heading toward the year-end, we think the risk-reward for the Kazakh currency remains compelling. We think the tenge is likely to remain stable or perhaps even appreciate over the remainder of the year. Short-term local rates will likely continue rising amid further rate hikes from the NBK, while longer-term rates are likely to remain more stable, as has been the case recently.> Tenge: An island of stability. In September, the tenge's one-month historical volatility approached the levels of some currencies pegged to the dollar (like the Azeri manat). It seems that this owed largely to the operations of exporters, state-owned companies and the National Fund, although the stability of the ruble due to Russia's fiscal rule was also a factor. We believe the downside risks, including the increased geopolitical risks faced by the ruble and the hawkish rhetoric from DM central banks, are unlikely to break the tenge's recent trend. > Rates: Flattening continues. Long-term local government bonds have held up well amid two straight hikes from the National Bank of Kazakhstan (NBK). Tailwinds have come from increased state pension fund purchases (see our previous edition), nonresidents' rotation from NBK notes into government bonds and limited issuance. Going forward, we expect the losses in long-term bonds, if there are any, to be limited. > Macro: NBK delivers another rate hike. The regulator raised its base rate 25 bps to 9.50% on September 13. It is likely to stay hawkish until there are clear signs that disinflation has set in. However, we think it will be cautious when further hiking rates. It could hike rates by another 25 bps in October if inflation deviates from the new forecast.> Economic growth cooling. Kazakhstan's short-term economic indicator, a monthly proxy for GDP, ticked up 4.7% y-o-y in August after rising 7.6% in July. As the low-base effect will fade over the remainder of the year, economic growth should continue to slow. That said, we are sticking to our GDP growth forecast of 3.7% for this year.> New draft budget. The budget deficit is projected at 3.3% of GDP next year, 2.8% of GDP in 2023 and 2.5% in 2024. The budget is based on a Brent forecast of $60/bbl for all three years. In addition to fiscal consolidation, the government is also considering countercyclical measures. These include limiting transfers from the National Fund and capping the growth rate for government expenditures.