I was surprised to see Kazakhstan’s stock market (KASE) zoom by 13.4% this week. And I found out that the rise has been due to a massive 19% devaluation imposed this week which mainstream attributes to “currency war”[1]. Yes stocks can serve as haven against hyperinflating governments.
Kazakhstan is basically a commodity (mostly energy) producing country[2],being the 9th largest country in the world, whose geopolitical origins have been linked with Russia[3]. Nursultan Nazarbayev[4] has been Kazakhstan’s first and only president since the country gained independence from the Soviet Union. President Nazarbayev has been alleged as a dictator[5].
What interests me is that despite the supposed low consumer price inflation, low debt to gdp levels, current account and trade balance surpluses, it is ironic to see a country devalue quite so massively.
It turns out that some of the statistics stated may not be accurate or deliberately fudged.
Since the 2008 global crisis, Kazakhstan’s government has engaged in a spending binge that has resulted in sustained budget deficits where such has been financed with an explosive growth of external debt. This is in spite of the low debt to gdp ratio where the gdp numbers looks cosmetically embellished.
Since attaining financing from external sources have been deficient, the government has tapped into the foreign currency reserves which has shrunk by nearly a third from the high of April 2011, as well as monetized her deficits as seen via a runaway M3. Kazakhstan has apparently adapted Argentina’s stylized policies of addressing internal imbalances[6].
Kazakhstan’s currency the tenga has endured almost a similar degree of sizeable devaluation in 2008. But recent financial pressures mostly on domestic financing may have forced the government to act. As one would realize, Kazakhstan’s dilemma has not been revealed by the current and trade balances but on her currency tenga, forex reserves, external debt and importantly M3. And another thing, given the 19% devaluation, this shows that the alleged low inflation figures have also been patently inaccurate.
The other lesson is that shouting “forex reserves!”, “forex reserves!”, “forex reserves!” or citing surpluses of trade and current accounts serves as no elixir against government rapacity (or from reckless bubble policies) as expressed via Kazakhstan’s financial markets.
While I am not certain that Kazakhstan’s policies would lead towards hyperinflation, exploding M3, unless curtailed, points towards this direction.
When stocks rise due to hyperinflationary policies, this isn’t about delivering real returns, but rather as signs of “flight to safety” (crack-up boom) where stocks as title to capital goods or real assets become a shock absorber from a collapsing currency.
However, the idea of thousands of % of gains in nominal domestic currency terms, under hyperinflation, may be equal to a buying power of just three eggs, as noted by fund manager Kyle Bass, on the Zimbabwe hyperinflationary experience[7].
[1] Bloomberg.com Kazakh Devaluation Shows Currency War Stirring as Ruble Dips February 12,2014
[2] Wikipedia.org Economy of Kazakhstan
[3] Wikipedia.org Kazakhstan
[4] Wikipedia.org Nursultan Nazarbayev
[5] CBSNews.com The world's enduring dictators: Nursultan A. Nazarbayev, Kazakhstan, June 19, 2011
[6] See Emerging Market Turmoil: The Fallacy of Foreign Currency Reserves as Talisman February 3, 2014
[7] CNBC.com Why Inflation Could Eat Into Stock Gains: Kyle Bass February 1, 2013
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