Recent carnage in the global equity markets has highlighted the plight that currently faces many emerging markets – particularly those that rely on crude oil exports to fuel their economies. The relentless rise of the US Dollar has only exacerbated the pain for those countries who ‘peg’ their currency’s exchange rate to the greenback. Citizens of Kazakhstan were dealt a rude surprise on the morning of 20 August when the country’s central bank suddenly announced that it would abandon its currency’s peg to the dollar. The reaction was immediate and ferocious. Within minutes the market price of the Kazakh tenge had decreased 23 percent and consumer savings immediately dropped by the corresponding percentage, in dollar terms. Dollars predictably disappeared from Almaty banks faster than vodka and boiled horsemeat at its trendy Gakku restaurant.
By refusing to defend its currency against dollar strength, Kazakhstan’s central bank is adopting the age-old tactic of currency devaluation as a way to make its exports more attractive – one that will almost certainly be repeated in the coming months as the combined pain of dollar strength and commodity weakness reverses the fortunes of many economies. In Astana’s case, currency manipulation may not be sufficient. Few countries have been more profoundly impacted by the global commodity slump, where oil and metals exports comprise over 70% of its economy. That US$ 3 billion commitment the country just made to host Expo 2017 may suddenly seem a bit extravagant.