The oil price crash has claimed another victim.
Kazakhstan’s tenge plunged an incredible 23% on Thursday after the government allowed the currency to float freely.
The policy change was designed to blunt the impact of falling oil prices. By letting the tenge fall, Kazakhstan can limit the loss of revenues in its local currency.
The vast central Asian country, which lies between Russia and China, gets about half its government revenue from the sale of oil.
Crude prices have fallen below $41 a barrel for the first time since early 2009, as traders anticipate more supply from Iran and weaker demand from China.
Kazakhstan was under pressure as a result. China’s shock currency devaluation, and the prospect of higher U.S. interest rates are making matters worse.
President Nursultan Nazarbayev, in a message released through state media, indicated that lower oil prices demanded action.
“The head of state stressed that due to the new economic reality it is needed to adapt to oil prices at $30-40 per barrel,” the presidential press service said.
The tenge had been tightly controlled for years, and allowed only to trade within a narrow band. Following the decision to float the currency, one U.S. dollar was worth more than 250 tenges.
Kazakhstan, like many developing countries, is also steeling itself for a possible rate hike by the Federal Reserve, something the U.S. central bank hasn’t done since 2006.
A rate hike would increased borrowing costs — interest on loans — for companies in emerging markets. It would also make American debt more attractive to investors, who could pull money out of emerging markets.
Adding to concerns, Beijing has devalued the yuan in recent days, a move that some think was designed to boost the country’s exporters. If that view finds traction, retaliatory actions could spark a currency war in Asia and further degrade vulnerable currencies.