Kazakhstan’s currency fell by a record 23 percent in trade on Thursday after the country abandoned control of its exchange rate, as it became the latest emerging market to scrap efforts to prop up its currency before the U.S. Federal Reserve hikes interest rates.
Kazakhstan is shifting to a free float of its currency and will pursue an inflation-targeting monetary policy, the nation’s Prime Minister Karim Massimov said during a government meeting in Astana.
The nation’s exchange rate will now be determined by supply and demand, Kazakhstan’s Central Bank Governor Kairat Kelimbetov said, adding that it would only intervene in the currency market if its stability was threatened.
Following the move, Kazakhstan’s currency — the tenge — plunged to an all-time low of 256.98 per dollar.
Kazakhstan, Central Asia’s biggest crude exporter, is under pressure amid the fall in oil prices and weakening economic growth in China and Russia, the nation’s top trading partners.
The decision by the nation to shift to a free float is the latest sign of stress in Asian exchange rates following a move last week by China to devalue its currency.
As China started to devalue its currency, fears grew that other regional Central Banks could follow suit with their own currency devaluations, as such countries are attempting to maintain their own competitiveness against China.
And as those feared, Vietnam was the first to follow in China’s footsteps as it took action last week and again on Wednesday as it decided to devalue its currency for the third time this year and also widened its trading band.
Malaysia’s ringgit and Indonesia’s rupiah tumbled the most since 1998, during the Asian Financial Crisis.
Colombia’s peso fell to a record low and South Africa’s rand fell to the lowest since 2001.
In Turkey, the lira also weakened to a record low.
“It’s a move to prepare for the Fed rate hike,” Tommy Ong, Managing Director for treasury and markets at DBS Bank, told Bloomberg. “In anticipation of higher U.S. interest rates, some emerging-market countries are opting to let their currencies weaken to stimulate exports and avoid massive intervention.”
The tenge should stabilize in five to seven days, Kazkhstan’s Central Bank Governor said, adding that the Central Bank is not targeting any particular exchange rate.
Nomura said in note on August 12 that the nation’s currency needed to weaken to between 235 and 268 per dollar to “correct” imbalances due to the slide in commodity prices and the overvaluation of the real effective exchange rate.
Kazakhstan’s shift to a free float “will create the necessary conditions for a recovery of economic growth, increased lending and investment activity, creation of new jobs and a decrease in the inflation rate to between 3 percent and 4 percent in the medium term,” Prime Minister Massimov said.