JAN. 7 2016 (The Conway Bulletin) — After Azerbaijan abandoned its currency peg to the US dollar, leading to a second sharp depreciation of the manat in 10 months, confidence in South Caucasus and Central Asian currencies reached a new low.

2015 was a tough year, which began with Turkmenistan slashing 19% off the value of its manat currency on Jan. 1, hinting that oil and gas exporting countries were facing bad times.

The following February, Azerbaijan devalued its currency and later in August Kazakhstan stopped pegging the tenge to the US

dollar, a decision that triggered a sharp depreciation. But although this trend is closely linked to the fall in oil prices since the summer of 2014, that’s not the whole story.

After the rouble collapsed at the end of 2014, it was only a matter of time for countries that enjoyed high trade volumes with Russia. They had to follow suit and devalue their currencies to remain competitive.

In addition, devaluing and unpegging a currency may also serve as a way to give stability to the domestic budget.

Kazakhstan’s Central Banker Daniyar Akishev said the tenge will follow the price of oil. That way energy-exporting firms will have a chance of balancing their books.

But countries with unpegged currencies need to keep an eye on speculation. Azerbaijan now requires a valid ID for currency exchange of more than $500 in value. Tajikistan put in place limits to ATM withdrawals of $400 and could reduce the number of licences for exchange points.

And interventions are unlikely to cease. Kyrgyzstan and Georgia’s Central Banks have already marked the first week of 2016 with purchases in the currency market.

ENDS

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(News report from Issue No. 262, published on Jan. 8 2016)

DEC. 16/18 2015 (The Conway Bulletin) — In the weeks leading up to an interest rate increase by the US Federal Reserve Bank on Wednesday, Central Banks in the South Caucasus and Central Asia fretted about possible repercussion on their own currencies.

Janet Yellen, who chairs the Fed, said interest rates would go up by 25 basis points from 0.25% to 0.50%. The Fed had postponed the decision for months and a rate increase was widely expected.

What will happen now to Emerging Markets? The US dollar will inevitably become more attractive to investors, which are likely to pull capital away from Emerging Markets back to the US.

The day after the rate increase, the value of the dollar grew by 1% against six major currencies. This, in turn, could further depress the price of commodities and pressure currencies in Central Asia and the South Caucasus.

Shortly after the Fed’s decision, the Georgian Central Bank also raised its interest rates to 8%, up from a level of 7.5%. And the following morning the Central Bank of Azerbaijan issued a statement saying it expects the new rate to affect the currency markets in the region.