Kazakhstan Economy - Dealing with Financial Contagion

The conflict in Ukraine, the new sanctions against Russia, the capital controls introduced in Russia and the drop in the ruble exchange rate have sent ripples across the CIS space. As one would expect, the countries with the strongest economic ties with Russia have been the most affected by the recent turmoil. The Kazakh tenge has lost almost 17% of its value versus the dollar since February 20, though the government and National Bank have already put in place several measures to support the currency. Taking into account the high commodity prices, Kazakhstan's sizable reserves and its low level of debt, we believe the government has the means to deal with the financial contagion.> National Bank hikes base rate and increases FX interventions to prop up the tenge. The Kazakh tenge has dropped 17% versus the dollar since February 20, dragged down by the ruble's sharp depreciation and the general geopolitical uncertainty in the region. On the other hand, it has strengthened 23% against the ruble during the same time frame, breaking below the range of RUB/KZT 5-6 it had been trading in for the last six years. In order to support the currency and soften inflation expectations, the National Bank of Kazakhstan hiked its key policy rate 325 bps to 13.5% at an emergency meeting on February 24, although it left rates unchanged at the scheduled meeting on March 9. The NBK has also stepped in with FX interventions. It sold $0.3 bln in February and has sold another $0.5 bln since the beginning of March.> Government introduces restrictions on moving FX and gold out of the country. The government recently announced a set of measures to limit the outflow of FX cash and gold from the country. These include a ban on moving more than $10,000 worth of foreign currency and gold out of the country.