Although Tunisia’s financial market has maintained a pattern of significant growth in recent years, progress has taken place in the context of economic uncertainty and a need for structural reform. The stock market’s role in financing the economy is modest when compared to that of the banking system, and the depreciation of the dinar has introduced a number of additional challenges.
Market authorities are aiming to inject more dynamism into the stock exchange by improving transparency, security standards, and attracting larger firms and unrepresented sectors. Indeed, several key industries that tend to act as investment anchors in other stock exchanges are not present on the Tunis Stock Exchange (Bourse des Valeurs Mobilières de Tunis, BVMT), leaving sizeable gaps in the market’s ability to garner investors’ interest. Therefore, sector authorities aim to convince a larger volume of small and medium-sized companies to enter the BVMT’s alternative market in search of financing.
Given that a large proportion of the exchange is made up of banking and other various financial sector stocks, an important aspect of the market’s future development will rely on its ability to continue broadening connections with the economy and attracting higher numbers of institutional investors to the exchange. “At the moment, about 64% of buying operations on the exchange are done by the retail market,” Bassem Neifer, an analyst at equity research company AlphaValue, told OBG.
Trading
In 2018 the BVMT’s total capitalisation was TD24.4bn ($8.5bn), or about 23.1% of nominal GDP, up from TD21.8bn ($7.6bn), or 22.4% in 2017, but under its record of 24.2% in 2010. Financial markets have reflected both the challenges and opportunities that have characterised the Tunisian economy over recent years. “Contrary to the country’s overall economic activity, the stock exchange has performed very well over the last few years, in particular throughout 2017 and 2018. This was driven by private companies exporting and expanding operations abroad, mostly in Africa,” Rym Gargouri Ben Hamadou, director of the corporate finance department at local brokerage Tunisie Valeurs, told OBG. In 2018 there were 82 companies listed on the main market. Just one new introduction, Tunisie Valeurs, was added to the market in September of that year.
Index Performance
Tunisia’s all-share index, the Tunindex, posted a 15.8% increase at the closing of 2018, up from 14.5% in 2017, to finish at a 7272 points. The Tunindex20, which tracks the performance of the market’s 20-largest stocks, grew by approximately 15.1%, finishing the year at 3249 points. This upwards trajectory was spurred by the solid growth of some heavyweight titles: software and IT services provider Telnet, which grew over 69% in 2018; stateowned insurer STAR Assurances, which posted a 37% increase; and Banque Nationale Agricole (BNA), which saw its value rise by more than 38%.
Despite this positive growth, capital markets authorities were cautious about the impact of performance measures. “While this is undoubtedly a positive development for the market, it does not translate into an evolution of the size of the market, in the diversification and enrichment of the… index, or in the contribution of the market to the financing of the economy,” Mourad Ben Chaabane, chairman of the board of directors at the BVMT, wrote in the exchange’s 2018 annual report.
In 2018 the BVMT performed well regionally, ranking second, after Qatar’s stock exchange, which posted 20.8% growth. Abu Dhabi and Saudi Arabia’s stock markets saw increases of 11.8% and 8.3%, respectively, in their indexes. The BVMT’s positive performance allowed listed companies to increase global dividends for shareholders by 9.4%, from TD690m ($239.7m) to TD755m ($262.2m). Dividends were distributed by 55 of the 82 listed companies in 2018.
Shifting Fortunes
Stock market performance that year was divided into two phases. In the first eight months of the year the main index grew by 34% to reach a record peak of 8432 points at the end of August. During this initial phase, the exchange was led by the strong performance of bank stocks, which resulted from high banking revenue, driven primarily by an increase in interest rates by the country’s central bank, the Banque Centrale de Tunisie (BCT).
This dynamic changed in the fourth quarter of 2018, when the BCT signalled its move to encourage a reduction in credit allocation in order to ensure liquidity in the market, in addition to requesting the fulfilment of stricter deposit-to-credit ratios by banks. The changes affected bank shares on the exchange. “These measures pushed banking shares down, which in turn led the market on a downwards trend towards the end of 2018,” Salma Zammit Hichri, head of the research and analysis department at brokerage MAC SA, told OBG. By the end of 2018 the stock exchange had lost approximately 13% of its gains from the previous year.
Following a similar trend, the BVMT began 2019 mindful of concerns about risk-management policies in the banking sector and ongoing economic challenges. Stricter solvency requirements will likely place pressure on banks, requiring them to make additional provisions as they operate in a volatile economic environment. According to the latest figures from the BVMT, Tunindex registered a loss of 5.3% yearon-year at the end of April 2019. This is particularly notable when compared to growth of around 13% during the same period in 2018.
Equity Market
The number of new arrivals on the BVMT has gone down over recent years, a decline that can be partially attributed to the ongoing economic challenges Tunisia faces. Between 2010 and 2018 the total number of companies listed on the BVMT rose from 56 to 82, demonstrating the private sector’s ability to successfully navigate the market regardless of any post-revolutionary instability. However, the number of new listings has somewhat declined in recent years. For example, in 2013 the BVMT welcomed 12 new listings, while 2014 and 2015 saw six and two additions, respectively, and in 2018 there was one. In 2017 two companies joined the stock exchange. Furniture designer and manufacturer Atelier du Meuble Intérieurs entered the market in the first quarter of the year, selling 1.2m shares, equivalent to 36.1% of the firm, for a total of TD5.2m ($1.8m). Another entrant, ceramics manufacturer Sanimed, joined the alternative market in March 2017, putting up 30.3% of the firm’s capital. Sanimed’s offer was 1.3 times oversubscribed, allowing it to meet its goal of TD17.1m ($5.9m) in capital-raising.
One challenge when attracting new companies to the stock exchange is convincing business owners of the benefits that can be derived from additional sources of financing. The effort required to prepare firms can prove especially difficult, as Tunisia is accustomed to having companies of all sizes managed by family-based hierarchies. “It is not only small and medium-sized enterprises (SMEs) that are not ready to implement the governance and accounting requirements to go on the stock exchange,” Hichri told OBG. “Many large companies are not ready to embark on those efforts either. We need incubators and mechanisms that can prepare firms to join the market, and even to help them manage the period after, where they need to adapt to the governance and informational requirements,” she added.
Breakdown
Despite some recent entrants, the BVMT remains skewed towards a limited number of economic sectors. In 2018 as much as 46.6% of the exchange’s capitalisation was made up of financial sector companies. The second-largest grouping was composed of fast-moving consumer goods companies, which made up 32.3% of capitalisation, while the third-largest sector represented was industrial manufacturing, amounting to approximately 10.3% of total market capitalisation.
The BVMT’s structure is notable in terms of the companies that are absent from it. Sectors such as oil and gas, and telecommunications, for instance, which tend to mobilise investor attention across other exchanges and are important facets of the Tunisian economy, have yet to join the exchange. In 2018 telecommunications companies accounted for about 0.38% of capitalisation, while oil and gas represented just 0.28% in total.
“If you look at the Casablanca Stock Exchange, Maroc Telecom played a large role in successfully attracting international attention to their capital markets. These are the type of companies we need to have represented in our stock exchange,” Khalil Ben Ahmed, chief of the department for market surveillance at the Financial Market Council (Conseil du Marché Financier, CMF), told OBG.
Upwards Trend
The financial market’s positive performance in 2017 and 2018 was driven by the banking sector, which accounts for about 40% of capitalisation on the exchange. The sector index grew by 19.5% in 2017 and an additional 10.6% through 2018. This contributed to a strong performance by the financial services sector index, including banks, insurance companies and other financial sector firms, expanding by 17% and 10.8% over 2017 and 2018, respectively. In 2018 overall, however, the insurance sector played the largest role, growing by 19.3%.
Solvability requirements may make business increasingly difficult for banks in 2019, and it is likely that the performance of banking shares will be moderately less impressive in the near term. “The new requirements will definitely impact bank revenue, though they will continue to make money,” Hichri told OBG. “Conversely, there are risks of non-payment and the need for higher provisioning. Banks will need capital increases, so over the coming years they will certainly limit their dividend distribution,” she said.
Food and beverages also posted a strong showing, finishing with a 38% increase in 2018, after expanding by 20% in 2017. However, poor performance in some sectors resulted in lower results for a number of indexes. The construction and building materials index decreased by about 12.2% in 2018, reflecting the recent slump in real estate activity. The automotive and equipment index also had a lacklustre showing, posting a 12.9% loss, which contrasted strongly with the 33.7% growth seen in 2017. It was negatively affected by depreciation of the dinar and the government’s reduction of car import quotas, which it implemented in an attempt to counteract the country’s ongoing trade deficit.
New Entrants
Tunisie Valeurs, 2018’s sole initial public offering, was 11.2 times oversubscribed when it debuted in September. The offer put 35.2% of its shares on the market and raised approximately TD21.8m ($7.6m). Local steel producer Société des Aciéries was scheduled to join the exchange in 2018, but requested a delay due to worries about the economic situation and mounting interest rates.
In an October 2018 interview, Bilel Sahnoun, CEO of the BVMT, stated that between three and five new companies could potentially join the market in 2019. This is likely to remain contingent, however, on changes in the economic and political environment, especially with parliamentary and presidential elections currently scheduled for late 2019.
“There are companies that are aiming to enter the stock exchange, but the current conditions are not conducive to new listings,” Hichri told OBG. “There are some capital increases expected, but it is neither the moment nor the year for new introductions. We do not know what the new government will do, so it is difficult to have a clear reading for how 2019 will end in terms of market performance,” she added.
Alternative Market
Tunisia’s alternative market was established in 2017 as a way to allow the country’s SMEs to find alternate forms of financing for their operations. Since its inception, however, the market has seen a slow rate of progress. As of early 2019, 13 companies were listed on the alternative market, but the CMF is working to fine tune regulations and strengthen the market’s appeal. “We want to limit participation in the alternative market to institutional investors who can actually collect information and understand the market,” Ben Ahmed told OBG. “We do not want it be influenced by retail investors that make it more volatile,” he said.
A new support programme is under way to back the listing of up to 120 Tunisian SMEs on the alternative market. It will help SMEs develop business plans and valuations of their companies, as well as provide coaching on organisation and interaction with market recipients. The programme is financed through a partnership with the African Development Bank and the UK Department for International Development, and will involve a grant of TD10m ($3.5m).
Foreign Investors
In 2018 international investors directed a total of TD165m ($57.3m) towards listed stocks. Over the same period, foreign investors sold TD273.1m ($94.9m) worth of shares. Nonetheless, capitalisation held by foreign investors increased to over TD6bn ($2.1bn), or 24.9% of the total, up from TD5.1bn ($1.8bn), or 23.3%, as of 2017.
Despite the increase in their relative participation, the presence of international investors in Tunisia’s capital markets is unlikely to sustain any significant changes. “Foreign investors are reticent because they have no certainty about this year. Fund managers that invest in certain countries need to have some visibility for two to three years at least. So in a sense, this is a period of transition, both politically and economically,” Ben Hamadou told OBG. Although some shares on the stock exchange have seen their value improve over recent years due to good sector-level performances, the current economic environment and high returns offered by the banking system make it difficult to increase the base of investors. “Banks are offering very good rates, so an investor making a deposit for six months can have very attractive rates over 10%. Between putting that money in the stock exchange and having the risk, the banking option is a lot more secure and clear-cut,” Ben Hamadou said.
Outlook
Though BVMT has successfully maintained its recent track record of progress, attracting a larger number of investors with long-term plans is critical for the market’s continued development. The financial marketplace is largely dependent on the performance of financial services heavyweights, such as banking and insurance shares.
This dynamic can sometimes obscure the positive impact that other firms, namely exporting companies, can have on the economy. Bringing other sectors into the exchange will make it more appealing to a larger pool of both domestic and international investors. In October 2018 the BVMT was officially welcomed into international standards organisation World Federation of Exchanges, a move that will likely raise its profile among international investors.
Despite its potential to be a reliable source of financing for small and medium-sized companies, Tunisia’s alternative market has so far fallen short of expectations. The alternative market must work to overcome the culture of many Tunisian businesses that have long depended on informal management structures. The project to help SMEs improve their governance and accounting practices, and prepare them for the BVMT, might lead to a more positive dynamic that will add a number of SME listings in the future. Efforts to attract new companies can be hindered by high returns on bank deposits, which discourages higher-risk investment alternatives like the stock exchange. However, as the economic recovery continues its upwards trend and various regulatory changes make their desired impact, the BVMT is positioning itself to benefit over the medium term.
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