Analysis of “Cascade Investments” Investment Company especially for Capitalmarket.banks.am.

“Explosion”, which happened to the Armenian currency on March 3, has various explanations, including “serious” ones, according to which AMD had been overrated by arbitrary methods for approximately 20%.

And, despite the fact that the appreciating currency is an excellent factor for an importing economy, this is not available anymore. Here the following questions occur: what became a stimulus for AMD devaluation and why was AMD depreciated for exactly 22%?

We believe that to find out the reasons for AMD depreciation, it is not enough to only analyze the domestic factors and their influence on the decision of the Central Bank (CB) of Armenia to make a transition to floating currency exchange rate policy.

In the first place, let’s note that on March 18, 2008, the Federal Reserve System (FRS) of the USA announces that it was getting ready to buy out bonds at the volume of 1.25 trillion USD from the market. To mitigate the consequences of pouring such a money volume to the market, the USA strived to first of all consolidate positions of the USD, create demand for the latter, and then increase the level of dollarization in global economy.

So, we suggest paying attention to certain details in processes of currency devaluation in the countries of our region.

First of all, let’s take the events, which took place in Kazakhstan. On February 9, 2009, the National Bank of Kazakhstan made a decision to decrease the exchange rate of national currency from 120 to 150 tenge against 1 USD. That is to say, only in the course of a day, tenge depreciated by 20% against USD, just like it happened in Armenia. In the diagrams, brought below, we present the behavior of Kazakh and Armenian currencies in devaluation periods.

Diagram 1 (USD/AMD)

Diagram 2 (USD/KZT)

The Georgian lari within the recent years had been demonstrating stable and positive growth against USD. Even during Russian-Georgian hostilities, the National Bank of Georgia, due to interferences, managed to preserve the national currency at a stable level. However, on November 10, 2008, lari depreciated against USD by 11%. Within the entire month of November, devaluation made over 16%, which is conditioned by weakening of intervention by the National Bank of Georgia.

In case with Armenia, just like in case with Kazakhstan and Georgia, the International Monetary Fund (IMF) welcomed steps of Central Banks, noting that the correction of national currencies’ exchange rate would have a positive effect on the economies of countries.

Diagram 3 (USD/GEL)

Similar developments were observed in Russia and Ukraine as well: devaluation of ruble against USD since September, 2008, made about 30%, and devaluation of hryvna - about 40%.

Diagram 4 (USD/UAH)

Diagram 5 (USD/RUR)

After the analysis of the currency trends in the countries of the region against USD, it is interesting to get acquainted with the behavior of USD itself against other currencies.

One should, in particular, pay attention to the fact that, starting from June, 2008, the index of USD (which reflects the USD exchange rate against the global basket of currencies) demonstrated 22% growth, including against its main competitors, as a result of which the relish of international (including Armenian as well) investors abruptly turned in the direction of USD.

Diagram 6 (USD Index)

From the diagrams above, it becomes obvious that the USD has demonstrated stable growth globally since mid-2008. In developed markets, the USA reached its goal with the use of market methods, in particular, with the help of powerful commercial banks. While in countries, where the market method is not expedient, but where there was the chance to sell USD, administrative levers, which the USA possesses, such as IMF, were used. The latter, carrying out its policy in Armenia, knew for sure to what exact degree it was necessary to depreciate AMD, and it is by no means by chance that our currency depreciated exactly at the volume, at which the global basket of currencies depreciated against USD.

Thus, the reason for AMD decline was not only the overrated nature of the latter, but also Armenia’s integration to the international policy of IMF.

And this means that it will be difficult to forecast the behavior of Armenian Dram basing on local factors, taking into account the fact that it, in fact, to greater extent depends on the global policy of IMF.

Basing on all stated above, we consider that processes, taking place in global markets, should enjoy special attention from the part of investors.

Yeghishe Qerobyan
Karine Davtyan
http://www.cascadeinvmts.com/