As the markets have calmed down after last week’s storm (August 5), we have an interest in closely monitoring what is happening on the Japanese side for one simple reason. We have 50 billion yen of debt to repay next October, the equivalent of 1,044 MTND at today’s rate. This is far from negligible since it will consume nearly 5 days of our net foreign currency assets.
Limited increase in rates
The major clearing of positions on the yen, as part of carry trade strategies , has strongly impacted the Japanese currency against other currencies. Now, we will have to expect the response from the Bank of Japan. The consensus suggests a cautious approach to raising interest rates in order to avoid a rapid appreciation of the yen after the recent turbulence.
The increase would be in the order of 25 basis points for the rest of the year, not exceeding 0.50% in any case. Let’s not forget that the Fed is expected to cut rates by about 200 basis points to 3% next year. This reduces Japan’s room for maneuver in terms of the size of its hikes, as this could translate into a much stronger yen. A balance must be struck since a weakening yen helps support stock markets, while a rapid strengthening could lead to a new bout of volatility.
As a reminder, the Bank of Japan raised its benchmark rate to 0.25%, from a range of 0% to 0.1%. In March, it raised its key rate for the first time in 17 years.
A gain of 5.1% on the Japanese maturity
These developments could impact debt servicing for Tunisia. At the end of 2023, the average exchange rate was 22.0690 TND for 1,000 YEN. Today, it is 20.9323. The 50 billion yen that cost 1,103.045 MTND at the end of 2023 are 1,046.615 MTND today, a gain of 56.433 MTND. Certainly, the Central Bank had followed the market and we hope that it intervened to take advantage of these favorable conditions.
Dynamic management of foreign exchange needs allows to save a few million dinars on the different currencies. Last year, the external debt service was lower than what was budgeted thanks to favorable movements in exchange rates.
Furthermore, and given the unprecedented financial pressure to which Tunisia is subjected, we believe that the Japanese market could represent an opportunity to raise funds. Tunis has excellent bilateral relations with Tokyo, even though the latter has made budgetary support of $100 million conditional on an agreement with the IMF. Rates are low, and we have met all repayment dates. We will cushion the cycle of lower external debt servicing from 2025.
A diplomatic effort and the choice of a good intermediary could provide us with liquidity with an acceptable rate (in single digits) compared to our sovereign rating. We must try because even if we resist for the moment, we are not immune to a macroeconomic shock that could strike at any time. The potential triggers are already numerous.
