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From Market Watch February 4 2009

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From Market Watch February 4 2009: Kazakhstan devalued its currency by about 18% Wednesday, as the mineral-rich, central Asian country struggles to contain a banking crisis and deal with the impact of tumbling oil prices. The National Bank of Kazakhstan decided to allow the country's currency, the tenge, to fall by around 18%. The central bank set a new target rate for the tenge at 150 versus the U.S. dollar, allowing the currency to fluctuate within 3%, up or down, from that level. The devaluat
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  From Market Watch February 4 2009:Kazakhstan devalued its currency by about 18% Wednesday, as the mineral-rich, centralAsian country struggles to contain a banking crisis and deal with the impact of tumbling oilprices. The National Bank of Kazakhstan decided to allow the country's currency, the tenge, to fall byaround 18%. The central bank set a new target rate for the tenge at 150 versus the U.S. dollar,allowing the currency to fluctuate within 3%, up or down, from that level.The devaluation comes only days after the Kazakh government vastly expanded its role in thefinancial sector by nationalizing two of the four largest banks and taking 25% stakes in two other lenders. The move also follows currency devaluations in Russia, Ukraine and Belarus. News of the devaluation drove Kazakhstan's five-year CDS [credit default swap] spreads higher by afurther 65 basis points to 1,083 basis points, according to RBC Capital Markets.The country's CDS spreads have been climbingsteadily in recent weeks, signaling that investors see agreater risk of sovereign debt default.In London Wednesday, the shares of Kazakh miningfirms rallied following the devaluation of the tenge andafter Eurasian Natural Resources said it doesn't have aneed to cut production further. The Kazakh minershave costs in tenge -- notably labor -- but sell themetals they extract in dollarsA page from Russia's playbook?The plunge in oil prices -- which are down 54% over the last 12 months -- has put pressure on Kazakhstan'seconomy as well as that of neighboring Russia, whichhas allowed the ruble to fall sharply in recent months.Both Russia and Kazakhstan have a vast wealth of natural resources, including petroleum andnatural gas. In taking a page right out of the Russian playbook, Kazakh policy-makers are trying to peg thetenge again after the failed attempt to defend it after oil prices plunged, said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. As such, we look for continued pressure on the currency, Thin said, adding that the market is betting that the new peg will be broken. Twelve-month forward contracts -- which allowinvestors to bet on or hedge against the future fluctuations of a currency -- show the tenge at186.315, or another 20% from current levels.In January, Russia ended its policy of managed mini-devaluations of the ruble and allowed one-off 10% devaluation, but also set a new trading limit for the currency. Subsequently, the rublehas continued to come under pressure, raising speculation about whether the Russian central bank will continue to aggressively defend the exchange rate by spending its internationalreserves.Like other emerging markets, Kazakhstan may be forced to approach the International MonetaryFund for help in the coming weeks, Thin said.Banking crisis The latest devaluation will pressure Kazakh banks and companies, which have severe currencymismatches, Thin said. Kazakhstan is struggling with a banking crisis along the lines of Iceland.   Iceland, a North Atlantic island nation, was plunged into crisis last October as its once-vibrant banking sector collapsed, sending its currency and stock market into a nosedive. All in all, Kazakhstan is being viewed as a smaller version of Russia: heavy state involvementin the economy, high dependence on oil exports, and falling foreign reserves. Win Thin, BrownBrothers Harriman & Co. Responding to its own banking crisis, Kazakhstan's government has bailed out all four of its biggest banks. On Monday, it effectively nationalized BTA Bank andAlliance Bank) , while it took 25% stakes in Kazkommertsbank, ) and Halyk Savings Bank.The devaluation of the tenge, which is aimed at preserving reserve levels, carries certain risksfor the sovereign, said Standard & Poor's in a statement Wednesday. A weaker currency is a positive for those export-oriented companies whose operating costs are denominated in tenge,the ratings agency said.However, the impact on the banking sector, which is highly leveraged externally, is negative,suggesting a further rise in contingent liabilities to the sovereign, S&P said.The impact for the sovereign so far seems containable, as Kazakhstan's fiscal and monetaryreserves, at 42% of gross domestic product, remain substantial relative to nearly all peers, theagency said. The second chief risk is that confidence in monetary stability and, by association, the bankingsystem could weaken further, triggering more downward pressure on the exchange rate, S&Psaid.Thin of Brown Brothers Harriman said: All in all, Kazakhstan is being viewed as a smaller version of Russia: heavy state involvement in the economy, high dependence on oil exports, andfalling foreign reserves. And sentiment toward Russia and all of Emerging Europe remains very bearish.Fitch Ratings cut Russia's sovereign credit ratings to only two notches above non-investment or  junk status Wednesday, saying the sharp decline in commodity prices, capital flight and therapid depletion of its foreign exchange reserves have weakened the country's balance sheet.Written by  Polya Lesova a New York-based reporter for MarketWatch.
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