Kazakhstan Local Rates - Downside for Tenge Looks Limited

We expect the tenge to at least retain its stability against the dollar in the coming weeks or slightly appreciate to 420. The currency has been lagging the recent upswing in commodity prices, which should create a certain safety cushion should oil prices undergo a correction. To generate carry, we advise buying 1m-3m NBK bills and holding them to maturity. Finance Ministry bond yields will likely continue rising in response to further rate increases by the National Bank. Meanwhile, we do not rule out further tenge weakening against the ruble. > Tenge: Weaker versus ruble, stable versus dollar. In October, the tenge hit its lowest level against the ruble since January 2020. This was due to elevated demand for imports and, subsequently, for rubles, given the rising share of Russian goods in Kazakhstan's overall import mix. In addition, the lower liquidity of tenge-denominated assets has likely been dampening the impact of the commodity price rally. Meanwhile, the tenge has been trading virtually flat against the greenback for a third straight month. > Rates: Finance Ministry bond curve set to approach 11%. We expect the front end and belly of the curve to be the most responsive to further NBK rate hikes. The revival of demand from the United Accumulative Pension Fund (the state pension fund) should continue mitigating the impact of hikes on the 10-15y segment. Our baseline scenario is that the curve will flatten near 11% over the next several months. > Pension fund flows: Net buyer of local debt, net seller of Kazakh sovereign Eurobonds. The UAPF was a net buyer of local government debt for a third straight month in September. Meanwhile, the fund has fully disposed of the dollar-denominated Kazakhstan 45, so selling pressure on the bond should abate. This was one of the reasons for the Kazakhstan 45's recent underperformance versus Russia's dollar sovereign curve. > Macro: More monetary policy tightening in the cards. The NBK raised its key policy rate by 25 bps to 9.75% at its monetary policy meeting on October 25. We expect rising global commodity prices, as well as the surge in domestic demand following the reopening of the economy, to continue to feed into higher inflation. Although we expect some sort of stabilization this year, inflation will likely remain above 8% y-o-y at the year-end. We therefore believe the NBK is likely to tighten monetary policy by another 25 bps in December.