Cancellation of mandatory sale of exporters' earnings did not affect the behavior of the banks - weekly review

/IRBIS, Nov.22, 99/ - Last week on the currency market of Kazakhstan was marked by a long-waited-for event: on November 15 mandatory sale of half of exporters' earnings at KASE was cancelled. It was announced on II congress of financiers. As a result, the news was surrounded by many comments on the country's economic situation, which has improved noticeably, according to the speeches made at the congress. Introduction of a floating exchange rate of tenge to dollar in April, growth of world prices of major articles of Kazakhstani exports, introduction of an electronic tax monitoring on the biggest enterprises of the country - all these gave the results, a the results of the third quarter let the government to speak about transformation into postcrisis development of Kazakhstan. It was obvious that mandatory sale had been cancelled on time, since the tenge has began to grow systematically against the dollar at KASE for about one and a half months ago. Both the dealers and the analysts are convinced that during this time the National Bank resisted the lowering of the exchange rate of the dollar by interventions, and thus, increasing its reserves and monetary base. In spite of all forecasts, cancellation of mandatory sale of exporters' earnings at the Exchange did not bring about some outrageous activities on the market. Moreover, tenge was strengthening against dollar more quickly during the week relative to previous period (51.8% APR against 27.4% APR in last week). During the week tenge gained 139 points or grew 1%. Analysis both of the week's results, and the poll of currency dealers show that the banks of the second tier (BST) are opening short positions in dollars by decreasing share of dollars in their assets structure. In addition to the banks, dollars are sold by their clients who were transferring certain part of their funds in currency accounts into tenges. Thanks to this process, demand for dollars from BST was almost absent on Monday, Wednesday and Thursday. To prevent a collapse of the exchange rate of an American currency the National Bank was the only buyer of US dollars during these days. It was the desire of the professional market participants and their clients to get rid of some currency that increased the volume of the trades from $11,779 mln to $12,770 mln during the week notwithstanding cancellation of mandatory sale. Specialists of IRBIS have talked to currency dealers several times, which helped to find out that nobody expects a growth of the dollar exchange rate in the short run. Such a confidence, typical to professional participants of our market, is due to various factors. Demand for the dollar decreased due to a significant growth in Kazakhstani exports. Specific number were given at the Congress of financiers. Volume of exports grew 58% in the third quarter of this year relative to similar period of last year. Payment balance of the country turned out to be positive by the results of the third quarter and is estimated to be $69.2 mln in January- September according to Statistics agency of Kazakhstan. For corresponding period of last year the balance equaled negative $1,110.2 mln. Inflation during 9 months did not exceed 14%, refinancing rate of the National Bank were reduced twice and is currently at 18% APR. Along with objective factors there are subjective factors. Introduction of one percent fee to purchases of an American currency by private persons deprived the banks of the second tier of the demand for dollars in cash from the population. It is this factor that had a significant influence on forming demand for non-cash dollars from BST at KASE. Introduction of customs fee on foreign currency brought in by legal entities on September 19 worked the same way: with the absence of demand from the population the banks were not able to compensate increased overheads by exchange rate differences. A certain psychological pressure used by the National Bank against BST on the eve of the cancellation of mandatory sale should not be left alone. TV channel "KHABAR" showed interview with Grigorii Marchenko, where the head of the National Bank did not reject his remarking to heads of BST: trends have changed and further increase in proportion of dollars in assets of the banks as well as speculative game for increasing the exchange rate of the dollar is hardly appropriate. In IRBIS analysts' opinion, effects of this factor should not be underestimated. Disposition of some journalists towards interpreting this statement as exerting an administrative pressure on the banks have no grounds. Private financial institutions were simply warned of further policy of financial powers, and thus, they were given an opportunity to find out their way in the trends to evade potential dealing losses in near future. Warning seems to be quite reasonable if a complete restoration of the reserves of the National Bank after the losses incurred by the Russian and world crises and currency inflows after selling rich harvest of grains are taken into account. Now the National Bank can neutralize unreasonable demand for dollars if it wishes or if there is a necessity to do so. At the Congress of the financiers Mr. Marchenko also said recently the National Bank was "working hard" to assess the real value of the tenge in US dollars on a domestic market based on analysis of many factors. Results of this work is planned to be used later in estimating market exchange rate of the tenge to the dollar. A significant difference between estimated and actual rates will indicate tenge to dollar exchange rate fluctuations are caused not by objective economic condition in the country, but by a speculative or rush events. In this case the National Bank will also correct the market rate. Analysts of IRBIS believe, somehow, the banks were familiarized with the results of the work mentioned above with complete consequences. In other words, growth in exchange rate of the dollar and proportion of dollars in the assets of the companies is not fashionable in Kazakhstan now. By proceeding from this thesis and based on the results of an objective analysis of all sectors of the financial market of the country it can be assumed the situation will hardly change in the next week. In dealers' opinion, "bottom" of the currency market (that is, the level at which the dollar can get stable) today is certainly determined by the head bank of the country. Without its support the dollar can fall down to 135 tenge per unit, according to the participants. However, protecting the interests of the exporters the National Bank can initiate such a jump of the exchange rate after failing to synchronize the decrease in financing interest rate and yield on government securities. Therefore, strengthening of tenge should go gradually.