Volatility on foreign markets persists: the US Fed is vigorously raising its rate, while the geopolitical risks are putting pressure on an outlook for the global economy. Despite this, the exchange rate of the national currency significantly recovered its positions in April. Deputy Governor of the National Bank of Kazakhstan Aliya Moldabekova commented what influenced the positive dynamics of tenge, and what factors influenced the change in international reserves.

– Ms. Moldabekova, what were the key events that influenced financial markets in April?

– During April, negative risk sentiment prevailed on foreign markets, mainly caused by two factors.

First, tightening of rhetoric of the US Fed’s representatives last month affected the rise in expectations for a sharper rate hikes. The data released on April 12 revealed that a new inflation record was reached in the US, 8.5% y/y in March. Then, on April 21, in his speech, J.Powell said that the May meeting would cover the issue of raising the rate by 50 bps. In turn, this entailed an increase in US Treasury yields and a strong global strengthening of the USD. DXY index rose by 4.7% for the month.

Second, the fears of slowdown in global economic growth due to realization of geopolitical risks and strict quarantine restrictions in China due to the outbreak of Covid-19 also put pressure on risk sentiment of investors. The International Monetary Fund significantly cut its economic growth forecasts to 3.6% in 2022 from 4.4% in the previous forecast.

All these had a negative impact on dynamics of the stock market. The MSCI World Index fell by 8.4% for the month, which was the largest monthly decline since the pandemic (March, 2020). Thus, since the beginning of the year, the index has fallen by 13.5%.

The oil market also remained volatile. If in early April prices fell reaching the level below USD 100 per barrel amid the reports of the US decision to use strategic oil reserves and introduction of strict measures by China to curb spread of Covid-19, then by mid-April, the fears of embargo of the Russian oil by the EU countries supported the recovery of quotes.

As a reminder, the representatives of the EU member states continue to discuss the sixth package of sanctions against Russia considering the possibility to ban imports of the Russian oil. On Monday, however, the European Commission failed to put pressure on Hungary to lift its veto on the offered oil embargo.

On May 16, the Chinese authorities announced gradual lifting of quarantine measures in Shanghai, which is the largest financial center, which served as a main driver for growth of the oil prices. As a result, since the beginning of May, oil prices have risen by 3% to USD 112 per barrel.

– According to the results in April, tenge exchange rate has noticeably appreciated. What factors influenced the dynamics of the national currency?

– In April, despite the ongoing uncertainty and volatility on global financial markets, tenge appreciated to 445.62 tenge per dollar, or by 4.6%.

During April, demand for foreign currency noticeably declined. The average daily trading volume on the Kazakhstan Stock Exchange shrank from USD 179 million to USD 92 million, with a total trading volume of USD 1.9 billion.
The deteriorating demand for foreign currency is primarily attributed to decreased imports, including by Russia, as a result of the disruptions in supply chains and possible failures in supplies. In addition, given the current situation, in the context of application of restrictive measures by the Russian Federation on export of certain types of products, it is possible to re-direct the imports to other markets, which requires time.

Also, continuing uncertainty, including on foreign markets, contributes to a waning activities of market participants.

In general, the market sentiment has changed, demand from individuals has stabilized, which also has a positive impact on the tenge exchange rate. It is worth mentioning that the measures to protect the tenge-denominated assets and an increase in the National Bank's rate to 14% contribute to ensuring stability of the financial market and maintaining attractiveness of tenge deposits. Against the background of the geopolitical situation and exchange rate volatility, dollarization level in the banking system in February 2022 rose to 38.4% mainly due to revaluation of the exchange rate. However, in March 2022 dollarization decreased to 36.9%.

Another factor behind tenge appreciation is recovery of the Russian ruble exchange rate as a result of the measures taken to control capital and mandatory sale of foreign exchange earnings by exporters.

Amid the stabilization of the situation in the domestic foreign exchange market during April, the National Bank did not carry out foreign exchange interventions. Along with that, we indicate that in case of short-term fluctuations in the exchange rate of the national currency, not supported by fundamental factors, presence of the National Bank on the foreign exchange market may be the case both on the selling side and on the buying side. At the same time, the National Bank will not limit the reasonable volatility of tenge.

Some support for the foreign exchange market of Kazakhstan was provided by sale of foreign exchange earnings by subjects of the quasi-public sector, which amounted to nearly USD 253 million. Sales of foreign currency to ensure transfers from the National Fund to the republican budget in April amounted to USD 168 million. Sales from the National Fund accounted for 8.7% of the total trading volume.

In early May, tenge continued its appreciation to 432.79, thus, since the beginning of the year, weakening of the national currency made mere 0.2%.

– What is the situation on the gold market and what is a current level of gold and foreign exchange assets?

– According to the preliminary data, gold and foreign exchange assets as of late April amounted to USD 33.5 billion performing an increase of USD 400 million for the month.

The growth in reserves is associated with an increase in the gold portfolio and a flow of funds to the accounts of the Ministry of Finance with the National Bank. Despite a slight decline in the gold price from USD 1,924 to USD 1,915 per ounce, the gold portfolio expanded by more than USD 200 million due to purchase of gold within implementation of the priority right. The impact of positive factors was partially offset by an outflow of funds from correspondent accounts of second-tier banks with the National Bank.

Having peaked in the second decade of April the gold prices changed their trajectory. In early May, prices continued to go down and are currently traded near a three-month low. Pressure on gold quotes was mainly exerted by appreciation of the USD in conditions of expected tightening of the monetary policy.

– How did volume of foreign exchange assets of the National Fund change in April and what factors influenced it?

– According to the preliminary data, the volume of foreign exchange assets of the National Fund in April totaled USD 52.5 billion performing a decrease of USD 500 million m/m.

Last month, 460 billion tenge were allocated from the National Fund to the republican budget via the transfers, mainly from the account balances in tenge of the National Fund as well as the tenge inflows to the Fund. Moreover, the assets worth USD 168 million were sold on the domestic foreign exchange market, which is equivalent to 79 billion tenge.

Against the background of disruption of the stock market, tightening of the monetary policy of the US Fed and other central banks of developed countries, as well as improved USD, investment income of the National Fund has been in a negative zone since the beginning of the year. It should be pointed out that long-term profitability of the National Fund remains positive and has been 3.23% per annum since the beginning of its establishment, and 2.40% per annum for the past 5 years.

– What are the further prospects for development of situation in the financial markets?

– In an updated report on global economic growth, the IMF highlights that consequences of the conflict in Ukraine will spread through commodity markets, trade and financial ties. Reduced supplies of energy and metals from Russia, as well as wheat and corn from Russia and Ukraine have already caused an upsurge in prices for these goods. Against this background, updated inflation forecast was 5.7% in developed countries and 8.7% in developing countries, which is 1.8 and 2.8 p.p. above the January forecasts.

The ongoing imbalances on global markets also entails a revision of oil forecasts by market participants. Thus, international analysts in the third quarter of this year expect Brent quotes to rise to USD 130 per barrel due to a larger-than-expected shortage of supply against the background of a ban on imports of the Russian oil by the EU countries. Forecast for global oil demand was cut by one million barrels per day amid worsening economic growth forecasts as well as escalating geopolitical tensions. Forecast for Brent brand quotes for the second quarter of this year was kept at USD 114 per barrel.

Investment banks continue to be constructive in assessing an outlook for stock market and expect prices to recover before the end of the year in their base scenarios. Thus, median value of the S&P 500 forecasts for the end of 2022 is 4,875, which practically implies a return to values of the index at the beginning of this year. At the same time, the forecast scenarios of investment banks are based on assumptions of a steady slowdown in inflation and avoidance of a recession in the economy.

At the same time, in view of the current trends, some analysts indicate the end of the cycle and the very market paradigm featured by low inflation, globalization and low volatility, which had been observed since the 1980s. In their opinion, financial markets are on the verge of a new cycle, in which the risk of inflation poses a greater threat than deflation. Therefore, investors should expand the diversification of assets, including by boosting a share of investments in real assets.

Source: Kapital.kz