Navigating Kazakhstan's High-Rate Landscape: Risks and Rewards in Equity and Currency Markets

Introduction
Kazakhstan's National Bank of Kazakhstan (NBK) has maintained its base rate at 16.5% since July 2025, signaling an unwavering commitment to curbing inflation, which hit 11.3% in May 2025. With inflation expectations rising to 14.1%, the NBK has warned of persistent risks, leaving investors to navigate a landscape of high rates, volatile equity markets, and a weakening tenge (KZT). This article dissects the near-term risks and opportunities for investors in Kazakhstan's equities and currency markets, amid unresolved policy uncertainty and structural challenges.

The High-Rate Context: Inflation and Policy Stance

The NBK's decision to keep rates elevated reflects its struggle to anchor inflation expectations. Key drivers include:
1. Domestic Demand Surge: Strong consumer spending and fiscal stimulus have fueled price pressures.
2. Cost-Push Factors: Rising production costs and global food price spikes (e.g., wheat and oilseed shortages) add to input costs.
3. External Shocks: Inflation in Russia (Kazakhstan's largest trade partner) and geopolitical risks in the region further complicate stability.

The NBK now projects inflation to remain above 10% through 2026, with a gradual decline to 5–7.5% by end-2027. While the central bank has ruled out immediate rate hikes, it emphasizes that “policy normalization will be data-dependent”, leaving room for further tightening if inflation persists.

Equity Markets: Growth Amid Uncertainty

Performance Overview

The Kazakhstan Stock Exchange (KASE) All Shares Index has shown resilience, rising 10.4% year-to-date (YTD) as of early July 2025, despite volatile trading volumes. Recent sessions saw the index climb to 6,160.74 on July 9, up 0.56% from the prior day, though volume dipped 1.9x.

Key Risks

• Interest Rate Drag: High borrowing costs could dampen corporate earnings, particularly for sectors reliant on credit (e.g., real estate).
• Profitability Pressures: Rising input costs may squeeze margins unless companies pass costs to consumers.
• External Sentiment: Geopolitical risks and global recession fears could trigger capital outflows.

Investment Opportunities

• Energy and Natural Resources: The reopening of the Tengiz oil field (operated by Chevron and ExxonMobil) and rising global energy prices support oil/gas stocks like KMGZ (KazMunaiGaz).
• Consumer Staples: Defensive sectors such as food and utilities (e.g., KZAP, KZTO) may outperform due to inelastic demand.
• Quality Growth Stocks: Firms with strong balance sheets and pricing power, like HSBK (Halyk Savings Bank), could weather inflation better.

Currency Markets: KZT's Volatile Dance

Current Trends

The tenge has faced downward pressure against major currencies:
- USD/KZT: Hovered around 511.55 in June 2025, with forecasts projecting a rise to 520.45 over 12 months.
- EUR/KZT: Touched a low of 613.23 (0.001631 EUR/KZT) in late June, reflecting the euro's strength.

Risks

• External Inflation Spillover: High inflation in Russia (a key trade partner) could erode KZT's competitiveness.
• Fiscal Deficits: If the government increases borrowing, it may crowd out private investment, further weakening the currency.

Opportunities

• Carry Trade Potential: Investors could exploit the high interest rate differential (16.5% vs. near-zero rates in the U.S./EU), though currency depreciation risks offset gains.
• Hedged Positions: Pairing KZT exposure with futures/forwards to mitigate FX risk could be viable for long-term investors.
• Central Bank Guidance: The NBK's commitment to transparency (e.g., publishing policy meeting summaries) may reduce uncertainty and stabilize the currency.

Near-Term Investment Strategy

1. Equity Investors:
2. Focus on Defensive Sectors: Prioritize energy, utilities, and consumer staples.
3. Avoid Leveraged Firms: Steer clear of companies with high debt ratios, as refinancing costs rise.

4. Monitor Earnings Reports: Look for companies that can offset inflation through pricing power.

5. Currency Investors:

6. Short-Term Caution: The KZT's projected weakness suggests selling tenge-denominated assets unless hedged.

7. Long-Term Play: If the NBK successfully reduces inflation, the tenge could rebound—monitor Q4 2025 data closely.

8. Hedging and Diversification:

9. Use FX forwards to limit downside risks.
10. Diversify into regional markets (e.g., Turkey, Poland) with similar high-rate dynamics.

Conclusion

Kazakhstan's high-rate environment presents a dual-edged sword for investors. While equities show resilience in select sectors, the risks of prolonged inflation and policy uncertainty demand a cautious approach. Currency markets remain vulnerable to external shocks but offer opportunities for those willing to hedge. Investors should prioritize quality, defensive exposure, and active risk management—especially ahead of the NBK's next policy meeting on July 11, 2025, which could recalibrate expectations for rates and markets.

Final Advice: Proceed with caution, but don't dismiss the potential rewards in this high-stakes, high-reward environment.

Data sources: National Bank of Kazakhstan, KASE Exchange, and author's analysis.