By Meirambek Idrissov
Astana, Wednesday, 11/11/15
The main auditorium of the Graduate School of Business was packed with close to 300 people for a lively keynote and panel discussion on the future of the regional economy. In attendance, an audience consisted of journalists, investment bankers, government representatives, and students and faculty of mostly Nazarbayev University. Captured by a discussions on exchange rates, monetary policy, import-export, inflation control, and international finance, this was clearly not an average audience.
Dr. David Robinson, an economist and Duke professor who sits on the World Economic Forum’s Global Agenda Council for Financing and Capital, kicked off the evening with a summary discussion on the floating tenge and its consequences.
In his analysis on the origins of devaluations, policy recommendations and possible outcomes, Mr. Robinson presented some interesting lessons from history, referring to Black Wednesday, the Asian financial crisis, and the crises in Argentina and Russia in the late 1990s. In his “lessons learned” from the historical cases, he discussed projections for the near future regarding the consequences of the floating exchange rate and put forth three ways in which Kazakhstan should develop in order to face its challenges.
To Float or Not To Float: Trade Imbalances, Growth, and Short and Long Term Effects
Firstly, Mr. Robinson argued that deterioration of the commodities prices on the global raw materials markets led to the collapse of the trade surplus over the last year. Because trade balance is mainly driven by raw materials, deterioration of the commodities prices led to weakening of tenge. But it’s not just a Kazakhstan problem: The instability of the Russian ruble and the Chinese yuan significantly contribute to the challenges currently facing the Tenge.
Secondly, if we look back at history, we can see that after the devaluation, which in the short term always harm the economies that are experiencing it, often a long-term growth has followed. While the origin of a currency crisis is different from case to case, growth always followed in the long run. For example, the British currency crisis in the beginning of the 1990s resulted from artificially low interest rates and a booming real estate market; the Asian financial crisis could be traced back to the problems in the real estate market in Thailand; and the devaluation of the ruble in the late 1990s in Russia was mainly caused by a fiscal deficit and ignited by the Asian financial crisis. Nevertheless, recovery from each financial crisis was quite fast in some cases. For instance, in Russia, oil prices rose again and domestic food production flourished. In other words, two mechanisms allowed for the quick recovery from the crisis: cheaper exports and cheaper home products, and thus increased demand for exports and increased consumption of domestically-produced goods.
Next, Mr. Robinson described some of the likely consequences in the near future. He argued that in the short run, the tenge will continue to weaken, the US dollar will probably strengthen, as interest rates in the U.S. are likely to increase and commodities prices will take time to recover. However, projections for the long term are not that evident, mainly due to dependence on oil prices, which are mostly outside of anyone’s control. Still, Mr. Robinson sees some measures that can be taken in order to increase success for economic growth in the wake of the tenge devaluation.
Among these measures, three are most distinct.
First, the tenge should be allowed to float more freely. This may lead to erosion of consumer confidence at first, but this effect can be moderated and softened by improving the availability of reliable market information, a core concept of a healthy free market system. This would require a more developed financial securities and financial markets system.
Second, promotion of a strong domestic production and privatization of corporate ownership are urgently required.
Third, ‘Samuryk-Kazyna’ needs to develop its transformation plans more quickly in order to improve productive efficiency.
Policies, Privatization, and Price Stability
After the keynote address, an expert panel commented on Mr. Robinson’s analysis.
Mr. Marek Jochec, a professor of finance, emphasized that privatization and productive efficiency of the private sector are key to Kazakhstan’s success, since there will be no productivity if assets are not owned privately.
Mr. Giulio Seccia, a professor of financial economics, commented on the role of the central ban and the monetary policy it might implement. Is it going to maintain price stability or smooth out the business cycle?
Mr. Dennis de Tray, a Chicago school economist, and previous Worldbank administrator, emphasized that raising confidence is very crucial and that firms are not likely to sell their assets if there is low confidence.
Furthermore, all participants alluded to the fact that in the short run a weakening tenge may cause social dissatisfaction, since prices of imported goods will rise while salaries and pensions will remain predominantly fixed. This will further create a social divide between those people who have access to dollars and those who do not have it. However, as Mr. Marek Jochec argued, (expensive) imports can be substituted with (cheaper) Russian goods, and moreover, domestic production in Kazakhstan should be developed in order to create an import-independent market.
Mr. Jochec believes that the overall picture is not that pessimistic, since new businessmen currently have a lot of opportunities during this economic phase of weakening tenge. Added Mr. Robinson, “every good entrepreneurial idea or smart innovation that comes out of Kazakhstan is now twice as appealing to the world market”. The key point is to develop home production and an export-oriented economy, believes Mr. Marek Jochec.