Deputy Chairman of the National Bank Aliya Moldabekova said in an interview on September 21 that the current situation with the strengthening tenge and the declining share of foreign currency deposits allow for the start of a phased liberalization of rates on foreign currency deposits. Note that the current maximum rate on such deposits is 1%. This was reported by Qazaqyia.kz citing Kursiv Media.
Expert forecasts
Chief analyst of the Association of Financiers of Kazakhstan (AFK) Ramazan Dosov noted that at the first stage of liberalization, the ceiling rate on foreign currency deposits could be raised to 2-3%. At the same time, this does not mean that banks will immediately raise their rates to the maximum level. The expert noted that they are constrained by other regulator requirements, in particular the high cost of such resources. Minimum reserve requirements (that is, requirements for banks regarding funds deferred to National Bank accounts) on foreign currency liabilities will be 15% from September, while on liabilities in tenge they will equal 5%.
At the same time, the tenge equivalent of the funds must be set aside in reserves. Thus, for every $100 attracted to a deposit, banks will have to withdraw $15, or 6.7 thousand tenge, from circulation.
"This limits the economic sense of active price competition for foreign currency deposits. Accordingly, the actual yield will depend on the need of a particular bank for foreign currency funding. Thus, the most likely scenario is a gradual one: first, expanding the permissible range of rates, then the market itself will show how much banks really need additional foreign currency resources," said Ramazan Dosov.
Banks' interest in foreign currency funding
Banks attract funds in foreign currency to provide foreign currency loans. However, such loans are most often sought by companies with foreign currency earnings, while large exporters also have access to external financing.
The expert believes that, in this regard, banks will not be very interested in actively attracting clients to dollar deposits. In addition, interest in such deposits, even with higher yields, may be limited. The difference in yield with tenge deposits will remain significant, so a foreign currency deposit will primarily be a tool for diversifying savings, rather than a full-fledged alternative to a tenge deposit. In this regard, the expert concluded that a noticeable increase in deposit dollarization depends more on currency expectations than on a rate increase.
The AFK analyst noted that initially the restrictions on rates on foreign currency deposits fulfilled their task of reducing dollarization, as it reached 80%. At the current level of 18.3%, the need to maintain a strict administrative ceiling is decreasing. The increase in minimum reserve requirements is already making foreign currency funding more expensive for banks. In such conditions, the yield on foreign currency deposits may depend more on the need of a particular bank for foreign currency funding and competition for such funds.
"In the long term, a transition to market pricing looks more logical, where the rate is determined by demand for foreign currency funding and the needs of a particular bank. That is why a phased approach looks justified. It allows first assessing the reaction of depositors and the dynamics of dollarization, and then consistently easing administrative restrictions," the expert added.
Market rates are needed
Independent financial analyst Andrey Chebotarev believes that rates on foreign currency deposits should be market-based – around 3-4% – and tied to SOFR (note – the "benchmark" interest rate in the US dollar money market) or the US Federal Reserve rate. Maintaining a yield at 1% when global rates are 4%, according to him, effectively means subsidizing banks at the expense of depositors themselves. A client keeping funds in a bank in dollars receives four times less than they could.
"Restrictions are needed, but not a 1% ceiling divorced from reality. A reasonable approach is a dynamic link to SOFR plus a spread of 0.5-1%. The regulator retains a tool of influence, the market receives a fair yield, and the depositor stops paying a hidden penalty for trusting money to a bank rather than hiding it at home," the analyst noted.
Chebotarev believes that raising the rate on dollar deposits will indeed attract some Kazakhstanis to foreign currency deposits, but the process should not become catastrophic. Those who, for one reason or another, wanted to keep money in dollars are already doing so in cash or abroad. At the same time, banks will be able to obtain foreign currency funding, issue foreign currency loans to exporters, and the market will become deeper.