Kazakhstan’s Devaluation Triggers Bank Runs

A few days back I wrote about Kazakhstan’s surprisingly huge devaluation despite what mainstream would see as strong statistical data. 

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.

Well my suspicion seems right, the devaluation exposed on Kazakhstan’s debt problems via a run on three banks

From EuroAsianet.org

Kazakhstan’s central bank is appealing for calm as rumors that some financial institutions are in trouble following last week’s currency devaluation have provoked a run on three banks.

On February 19 the National Bank sent text messages to the public urging people to disregard the “false information” and not succumb to panic.

“All Kazakhstani banks have sufficient funds in national and foreign currency,” the messages read; people should not submit to “provocations” and “keep calm.”

Large queues formed at some banks in the financial capital, Almaty, for a second day on February 19 as customers rush to withdraw funds, fearing a bank collapse.

Media and officials blame it on rumors.

But logic tells us that if the banking system stands on a firm ground then they wouldn’t be vulnerable to rumors. 

The reason banks are prone to runs aside from Kazakhstan’s existing debt problems has been the roots of the monetary system: central bank fractional reserve banking standard.

"The answer lies in the nature of our banking system", writes the great dean of Austrian economics Murray N. Rothbard, that’s because “they have far less cash on hand than there are demand claims to cash outstanding.”

Professor Rothbard further explains:

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

Given the recent bank run Thailand, it has been interesting to see what seems as increasing frequency of bank runs in emerging markets or failing financial institutions such as in China.

More signs that emerging markets could be the modern day version of "subprime". 

We live in very interesting times

Lessons from Kazakhstan’s currency Meltdown

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 9^th 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].

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[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