Tenge Crashes As Low Oil Prices Take Dramatic Toll On Kazakh Economy

With the lifting of Iran sanctions, the Tenge has crashed 5% to record lows at 377/USD (extending the currencies collapse since the USD-peg was scrapped in August).

 

Furthermore, as Eurasianet's Joanna Lillis reports oil production is entering a new year of decline this year in Kazakhstan - a dismal omen for a country so heavily reliant on energy exports.

Energy Minister Vladimir Shkolnik said on January 15 in remarks quoted by the Novosti-Kazakhstan news agency that Kazakhstan expects to pump 77 million tons of oil in 2016, 3.1 percent down on the 79.5 million tons produced last year.

 

The fall is down to the gradual depletion of the country’s oil fields, most of which have been under development for decades. As the fields dry up, recovering the remaining crude becomes more expensive, and with oil prices now hovering obstinately at $30, drawing Kazakhstan’s deposits is becoming costly.

 

And this latest government forecast may be too optimistic.

 

Shkolnik said in September that Kazakhstan would slash its oil output forecast for 2016 to 73 million tons if the oil price hit $30, as it has done this week. He said 77 million tons would be the target if oil stood at $40 per barrel.

 

The decline has been in train for several years already.

 

Oil output dropped 1.2 per cent in 2014, to 80.8 million tons, and 1.6 percent last year, to 79.5 million tons.

 

But it is the disastrously low prices that are taking the toll on the economy. The government announced on January 15 that gross domestic product grew by 1.2 percent last year – a significant slowdown on the previous year’s 4.3 percent.

 

The government is to meet on January 19 to discuss cuts to this year’s budget in the face of the economic slump.

 

Kazakhstan is also contending with a cataclysmic currency collapse that has seen the tenge plunge to record lows against the dollar. Now worth 377 to the dollar, the tenge has lost over 50 percent of its value since the central bank stopped propping it up in mid-August.

 

The authorities are now pinning many of their hopes on one project — the giant offshore Kashagan oil field. Kashagan, which is more than a decade behind schedule, is scheduled to come back onstream at the end of this year – although Shkolnik’s superstitious wording suggested less than full confidence.

 

“Fingers crossed, we will launch the Kashagan project this year, and it will from next year start making its contribution to the overall extraction plan,” he said optimistically.

 

Kashagan was briefly launched in fall 2013, but halted production after two weeks when a pipeline leak was discovered, necessitating a major redesign taking more than three years.

Finally, as The FT reports, Tatiana Orlova at Royal Bank of Scotland says the tenge could hit 400 to the dollar if oil slides to $20 per barrel “which, given current oil market dynamics, seems quite likely in the next 3 months.”

She warns that the National Bank of Kazakhstan (NBK) lacks the resources to provide any meaningful support to the currency:

In Kazakhstan, the NBK is pursuing a “dirty” float. It has admitted recently that it intervened in the FX market in December (Interfax).

 

We note that in the current year, NBK’s firepower is practically limited to the amount of the annual transfer to the budget from the National Fund, which is set at 2.3tn tenge ($6.3bn) in the 2016 republican budget.

 

Although NBK’s gross FX reserves appear stable at $28bn, we note that there is hardly room for intervention as they include gold worth $7.4bn, FX-denominated deposits of commercial banks and the FX leg of the FX swap operations with local banks (~$4.3bn as of the end of November, according to the NBK).