The Tenge's Fragile Valuation: Opportunities and Risks in Kazakhstan's Currency Market

Kazakhstan's currency market in 2025 is a battleground of competing forces: a depreciating tenge, soaring inflation, and a central bank grappling to stabilize the economy. For investors, the Kazakhstani Tenge (KZT) presents a paradox—both a high-risk, high-reward proposition and a cautionary tale of structural vulnerabilities. This article examines the strategic value of dollar exposure in this environment, dissecting the interplay of central bank interventions, inflationary pressures, and broader economic challenges.

The Tenge's Decline: A Perfect Storm

The KZT/USD exchange rate has depreciated by -3.30% year-to-date, with the tenge hitting a historic low of 545.38 KZT per USD in July 2025. This decline is driven by a combination of factors:
- Inflationary Pressures: Annual inflation in Kazakhstan surged to 11.8% in June 2025, fueled by utility reforms, VAT hikes, and imported inflation from Russia. Food prices alone rose by 10.6% year-on-year, while housing costs contributed 1.8 percentage points to the inflation rate.
- Central Bank Interventions: The National Bank of Kazakhstan (NBRK) has sold $950 million to $1.05 billion in foreign currency from the National Fund in 2025, aiming to stabilize the tenge. However, these efforts have been offset by a 2.21% appreciation of the USD/KZT rate since July 22, 2025.
- External Shocks: A weak tenge is exacerbated by global oil price volatility, U.S. tariffs, and the ruble's depreciation. Kazakhstan's reliance on Russia (22% of trade) amplifies its exposure to geopolitical tensions and sanctions.

Central Bank Policies: A Double-Edged Sword

The NBRK has adopted a multi-pronged strategy to stabilize the tenge:
1. Monetary Tightening: The base rate remains at 16.5%, one of the highest in the region, to curb inflation. However, this has not stemmed the tenge's depreciation, as external pressures outweigh domestic policy.
2. Currency Controls: New rules restrict legal entities from purchasing foreign currency exceeding $50,000 without justification. While this curbs speculation, it also limits liquidity for businesses, potentially stifling trade.
3. Mirroring Mechanism: Gold purchases from miners are offset by dollar sales, aiming to balance liquidity and avoid inflationary surges. This mechanism is projected to absorb $6.5–7.0 billion in forex sales in 2025.

Despite these measures, the tenge remains undervalued. Analysts at BCC Invest estimate its fundamental value at 505 KZT per USD, suggesting potential for appreciation if inflation moderates and the National Bank's interventions gain traction.

Inflation: The Invisible Tax

High inflation erodes the tenge's real value, creating a vicious cycle of depreciation and imported inflation. The Eurasian Development Bank (EDB) forecasts inflation will ease to 7.3% by year-end 2025, but this depends on the government's ability to slow utility price hikes and manage fiscal policy.

For investors, the risk of holding tenge assets is acute. A weaker tenge raises import costs, squeezing consumers and businesses alike. Meanwhile, dollar-denominated assets offer a hedge against this devaluation, though they come with their own risks, such as U.S. interest rate hikes or geopolitical shifts.

Structural Vulnerabilities: Beyond the Tenge

Kazakhstan's economy faces deeper challenges that threaten long-term stability:
- High Public Debt: At 60% of GDP, public debt limits fiscal flexibility.
- Weak Manufacturing Base: Reliance on raw material exports (oil, gas, metals) leaves the economy vulnerable to commodity price swings.
- Dependence on Russia: Despite diversification efforts, Russia remains a critical trade partner, exposing Kazakhstan to ruble volatility and sanctions.

These structural issues suggest that even if the tenge stabilizes, the economy's resilience remains unproven.

Strategic Dollar Exposure: Balancing Risk and Reward

For investors, dollar exposure in Kazakhstan's market is a nuanced decision. Here's how to approach it:
1. Hedging with Tenge ETFs: Instruments like the Deutsche Bank Tenge Forward Fund (DBVTF) offer exposure to the tenge while hedging against short-term volatility. Pairing these with short USD positions or energy ETFs (e.g., XLE) can offset oil price risks.
2. Monitoring Inflation and Trade Flows: Inflation data and trade volumes with Turkey (e.g., the $730 million bilateral swap agreement) could signal tenge demand shifts.
3. Scenario Planning: BCC Invest outlines three 2025 exchange rate scenarios:
- Baseline: 533.4 KZT/USD by year-end.
- Optimistic: 506.1 KZT/USD (if fiscal discipline improves).
- Pessimistic: 561.9 KZT/USD (if global dollar strength or geopolitical risks escalate).

Conclusion: A Calculated Bet

Kazakhstan's currency market is a high-stakes arena where central bank interventions, inflation, and structural risks collide. For investors, dollar exposure offers a shield against tenge depreciation but requires vigilance. The tenge's potential appreciation hinges on the NBRK's ability to curb inflation, stabilize the currency, and address structural weaknesses. In the meantime, a diversified strategy that balances dollar assets with hedging tools and regional insights may offer the best path forward.

As the tenge's valuation teeters between fragility and resilience, one thing is clear: Kazakhstan's market demands both courage and caution.