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How the New Monetary Policy Affected Stock Market in Kazakhstan?

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In 2014 and 2015, the trade volumes in terms of tenge of Kazakhstan Stock exchange (KASE) grew with an enormous pace, with annual growth of 45.9% and 97.0% respectively. In 2014, the trade volumes reached 46.7 trillion tenge ($260.4 billion), while in 2015 the trade volumes reached 92.0 trillion tenge ($429.6 billion). However, the growth rates stalled in 2016, when the trade volume in terms of tenge of KASE grew only by 2.8% to 91.97 trillion tenge, while trade volume in terms of the US dollar decreased by 35.7% to $276.27 billion. There is one major reason for the stalled growth. The growth rate of KASE went down because the National Bank of Kazakhstan (NBK) implemented inflation targeting policy. Even more, the enormous growth rates of 2014 and 2015 were also due to the NBK’s fixed exchange rate.

During the second half of 2014 and 8 months of 2015, the NBK had been maintaining the fixed exchange rate of tenge with the US dollar. The bank maintained the currency through foreign currency market interventions in spot and swop markets[1]. For example, according to the Chairman of the NBK, Daniyar Akishev the bank spent $22 billion in 2014 and $17 billion in 2015 in order to keep the exchange rate fixed. Therefore, the NBK was an active participant of KASE and made a significant contribution to the overall trade volume in the stock exchange. In addition, because of the speculations about devaluation, the population and non-banking legal entities actively converted their currencies in banks and currency exchange shops, forcing these institutions to actively buy and sell currencies in KASE to cover the high demand.

Because of these speculative sentiments and the currency interventions, the trade in KASE’s foreign exchange trading platform grew significantly in 2014 and 2015. For instance, according to the Annual reports of KASE for 2014 and 2015[2], the share of foreign currencies trade in overall trade in 2013 was 57.4% ($120.5 billion), and the share increased up to 72.3% ($187.98 billion) in 2014 and to 72.8% ($312.8 billion) in 2015. These data show that most of the overall trade volume of KASE is foreign currency trade, and it had grown by almost three times from the end of 2013 to the end of 2015. Now if we look at the NBK’s interventions, we can observe that 11.7% of the foreign currency trade of KASE was made by the NBK in 2014 and 5.4% was made in 2015, meaning that the NBK was one of the main actors of the trade in KASE. Meanwhile, the bank accounted for 8.4% of the total trade of KASE in 2014 and 4.0% in 2015.

The foreign currency trade flourished between 2014 and 2015, while all other trade platforms, such as the government securities trade, the trade of shares, the trade of corporate bonds, repo transactions, futures contracts all decreased by 19.13% from $89.46 billion in 2013 to $72.13 billion in 2014. In 2015, these trade platforms grew by 61.9% to $116.8 billion mostly due to the growth of repo transactions by 66.1% from $62.75 billion to $104.2 billion, which accounted for 24.3% of the total trade of KASE. The repo transaction grew mostly because of the fact that after the adoption of inflation targeting policy in August 2015, the NBK started to provide liquidity to the financial system through the repo transactions. Since the transition to the new policy, the highest activity in the repo market was seen in October 2015, when the volume of trading in that sector exceeded 4.0 trillion tenge ($18.6 billion) or 17.8% of total repo transactions in 2015. Along with high trade volumes, the rates of repo transaction were very volatile, which reached 317% in December 2015.

The new policy changed the trade structure of the stock market. For example, foreign currency trade decreased by 66.5% from $ 312.2 billion in 2015 to 104.8 billion in 2016. The share of foreign currency trade decreased to 38.0% of the total trade volume of KASE in 2016 from 72.8% in 2015, showing that speculative sentiments on national currency abated in 2016. Moreover, according to the Chairman of the NBK, Daniyar Akishev, from September to December 2016 the NBK did not intervene to the currency market[3], indicating that there was a stability in currency exchange market. January was the month with the highest amount of trade in 2016 with $15.4 billion, while May had the lowest trade volume in 2016 with $5.8 billion. It is worth mentioning that in December 2016 trade in foreign currency platform of KASE reached $11.9 billion, which is the second highest monthly volume in 2016.

In other hand, repo transactions soared in 2016. The share of the repo transactions reached 60.7% of the total trade of KASE in 2016, while as we noted above in 2015 the share was 24.3%. The growth rate of repo transactions in terms of tenge was 146.0% and reached 23.2 trillion tenge, while in terms of the US dollars the rate was 60.8% and reached $167.5 billion. The reason here was the new monetary policy of the NBK, which requires the use of such instruments as repo transaction as a main monetary mechanism of a central bank.

However, this new policy also requires keeping inflation low and stable. To achieve this goal, the NBK had to keep repo rates relatively high. For the first half of 2016, the rate was 17%, while during the second half the rate had gradually decreased up to 12%. These relatively high rates increased the cost of funding, and because of that, most companies decided not to borrow money from the stock market. In 2016, initial placement of corporate bonds made $1.25 billion, while a year ago the amount of placement was $4.41 billion, showing that in 2016 legal entities were not interested in issuing bonds.

Similarly, the trade of stock decreased in 2016. According to KASE, the trade of stocks reduced by 84.3% from $4.74 billion in 2015 to 744.1 billion in 2016. The decrease was significant, but if we look at the trade data of 2015 in detail, we can observe that $4.0 billion of the total trade of stocks was one deal. The deal was made on 6 August 2015, when the NBK bought 10% of the Kazmunaigaz for 750 billion tenge or $4.0 billion getting financial help from the National Fund of Kazakhstan[4]. Therefore, the trade of stocks excluding this transaction in 2015 was almost the same as in 2016, meaning that there was not a decrease in the trade of stocks in 2016.

Overall, during 2016 KASE experienced major changes in its trade structure, which was mostly due to the new monetary policy of the NBK. These changes show how the focus of the bank changed from an exchange rate based policy to a repo transactions based policy. In previous two years, foreign currency trade was the main driver of the trade in the stock exchange, and because of the decreased volume of trade, the total trade of KASE decreased in terms of the US dollar, and only slightly grew in terms of tenge. It is not expected that in 2017 the trade structure and the trade volume will change significantly if the NBK continues to implement this policy. However, we may expect that in 2017, corporate bonds market will grow, because of the lower base rate in 2017, which will be 12% and lower.

Daniyar Nurbayev







[1] The Spot operations – is the operation when the economic agents buy one currency against selling another currency at an agreed price for settlement on the spot date. While the Swap operations – is the operations when one economic agent lends one currency to the second agent while simultaneously borrows another currency from the second agent. In case of the Swap operations, two parties pay each other some interests, the amount of which depends on the supply and demand on each currency.

[2] http://www.kase.kz/files/reports/KASE_meeting_2014_en.pdf


[3] https://kapital.kz/finance/56565/nacbank-4-mesyaca-ne-provodil-intervenc…

[4] http://www.kase.kz/en/news/show/1265713

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