It’s safe to assume that when R.E.M. dropped their track “Strange Currencies” 20 years ago, Michael Stipe & Co. didn’t exactly have foreign exchange markets on their mind. Yet when currencies that aren’t exactly front and center at JFK or Heathrow’s bureau de change take center stage, said ’90s alt rock classic is an all-too-appropriate earworm for the monetarily minded.
By and large, emerging-markets forex and equities have been getting side-eye for some time now. Much of the attention has been on China’s effective devaluation of the yuan earlier this month. And for good reason. The Black Monday plunge of August 24 was a wake-up call that the markets were returning to their natural, less placid state. Last week the collective dip of those lower-profile economies with heavy China exposure was enough to register on U.S. markets. Together, they were the currency mouse that roared.
Take Kazakhstan, for example, where on August 20 the country’s central bank let go of its band of 170 to 198 tenge (pronounced TEN-gay, if you didn’t know) to the dollar, letting it float freely. The currency dropped more than 25 percent right off the bat. It recovered somewhat early this week, though the week wound down with another swoon, to 237.66 per greenback.
The country that’s culturally a little bit Central Asia, a little bit Russia, and with some nomadic culinary holdovers such as qarta, boiled and pan-fried horse rectum, has been a bastion of economic resilience in recent years. According to the World Bank, its 2014 per capita GDP was $12,276.40, just a few hundred dollars behind its onetime ruler Russia and ahead of Turkey, its ethnic and linguistic kin and the first country to recognize Kazakhstan’s independence. Kazakhstan introduced sweeping reforms to its post-Soviet pension system in 1998, based on the Chilean model. The country saw its first automated teller machine in 1997, and by the end of 2002, there were 702 ATMs, or 47.1 ATMs per million inhabitants. As a point of comparison, its southern neighbor, Uzbekistan, which Kazakhstan has supplanted as the region’s foreign policy darling, unveiled its first teller machine that year.
These economic leaps and bounds were thanks in large part to exports of the country’s extensive oil reserves. Kazakhstan was feeling somewhat smug that at long last its growth rate would eclipse that of Russia. But oil hasn’t exactly been a hot commodity of late, calling the likelihood of that into question.
President Nursultan Nazarbayev, who has ruled the country in some capacity since it was a Soviet republic, warned his countrymen to brace for $30- to $40-a-barrel oil. The devaluation of the yuan by China, a major trading partner, was a sidekick in the knee to Kazakhstan’s already shaky legs. And the country’s second-biggest export is yet another commodity, ferrous metals. Part of the grand diversification plans of Kazakhstan was to channel its petro-spoils toward building up industry. Less spending power in foreign exchange terms is likely to put a crimp in these plans, though two tranches totaling $1 billion from the Asian Development Bank given to Kazakhstan amid the forex tumult should help to stanch regional contagion. The Kyrgyz som and the Tajik somoni fell 5 to 6 percent against the dollar in light of the tenge’s skid and the move by hermitlike, natural-gas rich Turkmenistan to devalue the manat by 20 percent earlier this year.
For Kazakhstan, loosening the currency band has given the economy a bit of wiggle room. “A more flexible exchange rate will also insulate public finances against the oil price decline,” noted a statement from Fitch Ratings following the free float. “We expect the draft 2016 budget ... to adopt a more cautious fiscal stance.” In May Fitch reaffirmed its BBB+/Stable rating on the country. The agency will have a chance to assess the efficacy of the float when it revisits Kazakhstan’s sovereign rating on October 30.
Another country to let go of the currency reins is Vietnam, which in reaction to the devaluation of the yuan and in anticipation of any rate normalization by the Federal Reserve, weakened the dong for the third time this year, to 3 percent against the U.S. dollar, and broadened its trading band from 2 to 3 percent. Vietnam Central Bank deputy governor Nguyen Thi Hong says there are no further devaluations planned for the year, as policy actions have given the dong’s rate enough space to move. This most recent devaluation came after a similar promise. In comments on Tuesday, Nguyen Tan Dung, the prime minister of Vietnam, proclaimed that the Vietnamese economy has so far come out of this recent spat of volatility unscathed, though he did note that “regional and global conditions remain extremely unpredictable.” Part of the country’s economic plan, Dung says, is to shore up crude oil production.
Oil taketh, oil giveth. One thing is for certain, though. Thanks in part to both the commodity and to China’s currency swings, the tenge and the dong have made it onto the charts.
Follow Anne Szustek on Twitter at @the59thStBridge.
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