Kazakhstan Economics - Tenge Has Recovered, But Room for Monetary Easing Limited

The Kazakh tenge has pared most of its losses from earlier this year (it was down just 6% YTD versus the dollar recently). Taking into account the recovery in EM currencies against the dollar, the compression of risk premiums across the globe and rebound in oil prices, it is now close to what we believe to be its equilibrium level of UZD/KZT 400-410. Still, its sharp depreciation in March caused inflation to jump, reaching 7.0% y-o-y in June. As inflationary pressure is set to ease somewhat due to the weakened state of the economy, the National Bank could deliver another rate cut, but the room for easing is limited due to Kazakhstan's quite lax fiscal policy.Volatility in the tenge has increased quite significantly this year due to the drop in oil prices and the turbulence in the EM currency space. The tenge reached its lowest point in mid-March, weakening to 457 against the dollar, where it was down around 17% YTD. At the time, Brent was down nearly 60% YTD at close to $27/bbl, still above its lows for the year. However, the tenge was able to find its footing over the following weeks, even as Brent continued to fall. By the end of June, it had moved close to USD/KZT 400, having pared its YTD loss to just 6%. It found support from a rebound in oil prices and a general recovery in EM currencies.However, the tenge's sharp depreciation, along with the spike in demand for food and other essentials during the lockdown in March-April, boosted inflation. The headline gauge reached 7.0% y-o-y at end-June, up from 5.4% at end-2019. However, given that the tenge has stabilized and the inflationary shock from its depreciation in March will fade, and given that inflationary pressure will ease due to weak domestic demand, a further rate cut in the following months is possible. Still, as inflation will remain above the central bank's target range of 4-6%, and also in light of the significant increase in budget spending announced by the government to support the economy (we expect a budget deficit of nearly 9% of GDP this year), the scope for further monetary easing is likely limited to 50-100 bps, in our view.