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Currency pegs in crude-producing nations are set to topple as the world enters a "new era" of low oil prices, according to the Prime Minister of Kazakhstan, which rattled markets this week with its surprise decision to abandon control of the exchange rate.
"At the end of the day, most of the oil-producing countries will go into the free floating regime," including Saudi Arabia and the United Arab Emirates, Karim Massimov said in an interview on Saturday in the capital, Astana. "I do not think that for the next three to five, maybe seven years, the price for commodities will come back to the level that it used to be at in 2014."
Central Asia's biggest oil producer cut the tenge loose, triggering a 22 per cent slide to a record low versus the dollar. The move followed China's shock devaluation of the yuan the week before, which drove down oil prices on concern global growth will stutter and raised the prospect other nations with managed exchange rates will allow their currencies to weaken to stay competitive.
Brent crude touched a six year-low of $45.07 per barrel and the Dow Jones Industrial Average entered a correction. More than $3.3 trillion has been erased from the value of global equities after China's decision spurred a wave of selling across emerging markets.
"After I watched what is happening on the financial market and stock market in the US on Friday night, I thought that we did it at the right time," Massimov said. The decision avoided "big speculation and pressure this weekend in Kazakhstan," he said.
Before Kazakhstan's move to a free float, the tenge was at a competitive disadvantage to Russia, one of its top trading partners. The currency had lost 7.6 per cent in the 12 months before August 20, compared with a 46 per cent depreciation for the ruble and a 55 per cent plunge for crude.
