Regulators deepening Tunisia's capital market offerings

While Tunisia has faced weak economic growth and high inflation in recent years, the country’s stock market continued to grow over the 2016-17 period, even though its contribution to private investment financing remains relatively modest compared to that of the banking sector. Measures to deepen the market, however, are under way, aiming to attract an increased number of small and medium-sized enterprises (SMEs) to the bourse, while also improving its security and transparency standards to entice further institutional and foreign investors to join the currently retail investor-dominated exchange.

Capitalisation & Contribution 

Total market capitalisation was TD23.4bn (€9bn) at the end of February 2018, up from TD19.8bn (€7.6bn) at the same point in 2017, TD18.5bn (€7.1bn) in February 2016 and TD12.34bn (€4.7bn) in early 2011, according to the Tunis Stock Exchange (Bourse des Valeurs Mobilières de Tunis, BVMT).

Market capitalisation was equivalent to 22.4% of GDP in 2017, according to economic output datafrom the IMF, having regained ground lost during the years that followed the country’s 2011 revolution, which saw the figure decrease from 22.4% in 2011 to 21.4% in 2014. Capital markets’ contribution to the financing of private investment fell from 10.1% in 2015 to 8.6% in 2016, according to the latest figures available from the Financial Market Council ( Conseil du Marché Financier, CMF), which were largely dominated by corporate bond issues at 95%, with the remainder being provided by capital increases.

Equity Market 

The number of listed companies on the equity exchange of the BVMT increased to 81 in 2017, up from 56 in 2010, although listing activity has slowed in recent years, from 12 initial public offerings (IPOs) in 2013 to six the year after, two in 2015, one in 2016 and two again in 2017. The largest sector represented on the main market is the financial services industry, whose 26 listed companies accounted for 50.2% of capitalisation as of February 2018, followed by consumer goods at 29.7% and consumer services on 6.9%.

Market capitalisation is top heavy, with drinks manufacturer Société de Fabrication des Boissons de Tunisie (SFBT) accounting for 11.9% of the total as of February 2018, followed by Banque Internationale Arabe de Tunisie (BIAT) with 10.1%. Together, the 10 largest firms on the equity market made up 63.4% of the total, up from 56.2% at the end of 2016, implying that price moves in any of the top companies can have a significant impact on overall market performance. “Given their weight on the equity market, together SFBT and BIAT can determine the value of the index, which illustrates the concentration of the market and the limited amount of heavyweight companies listed on the stock exchange. Although the Tunisian economy is in part made of large family-owned conglomerates, many are not yet listed on the stock exchange,” Bassem Neifer, an analyst at equity research firm AlphaMena, told OBG.

Trading 

Secondary trading in listed securities on the BVMT reached TD254.1m (€97.6m) in the first two months of 2018 – with 35% composed of bonds and the remainder composed of equities – up 7.8% from the same period in 2017. For the year as a whole, the figure stood at TD2.4bn (€921.5m), a rise of 38% from 2016, which was down 18.8% from 2015. The market continued to be dominated by retail investors, accounting for about 60% of the total, while brokers make only 12% of trades. However, observers believe that an improvement in the market’s transparency could help to attract more institutional investors in the future. “Retail investors should not exceed 20% of the market. However, their current weight in short-term price fluctuations, including for large companies which possess floating stocks, is too large,” Khalil Ben Ahmed, head of supervision at the CMF, told OBG.

Foreign Participation 

Foreign investors held 23.5% of capitalisation at the end of February 2018, down from 24.5% the previous year, but up from 21.1% in 2011. ”The current environment is not favourable for foreign investment as the market suffers from a shortage of liquidity along with high currency risk. Foreign investors are more likely to wait until macroeconomic stability returns, allowing for greater visibility on medium- to long-term profitability,” Neifer told OBG. Notwithstanding these current obstacles to foreign investment, Tunisia maintained its status as a frontier market in the 2017 FTSE classification, on improvements in terms of liquidity and negotiation mechanism efficiency.

Promotion 

As part of their efforts to promote Tunisian capital markets, the BVMT and the CMF have set up several international strategic partnerships, including with Europlace Paris; the major financial operator of the eurozone, Euronext; and the US Nasdaq, as a means to share international best practices and galvanise the bourse.

Closer to home, the market authorities are also pursuing strategic ties with local and regional partners. The CMF was appointed president of the Union of Arab Securities Authorities for the 2017-18 period, and it organised the union’s 11th annual conference in Tunis in March 2017, allowing the bourse to target investors from around the Arab world.

Index Performance 

Tunisia’s all-share index, the Tunindex, performed well in 2017 and early 2018, achieving a high of 6699 points at the end of February 2018, a year-on-year increase of 19.5% from 5607, following a flat 2016. The Tunindex20, which covers the 20 largest stocks, experienced even higher growth between February 2017 and February 2018, up 27.8% to 3069 points.

“These growth figures may be accounted for by the banking sector, which largely dominates the index and experienced exceptional performances in 2017, somehow disconnecting the Tunindex from overall relatively low economic growth figures,” Neifer told OBG. Perspectives for the capital market in 2018 are positive, according to Rym Gargouri Ben Hamadou, director of the corporate finance department at brokerage Tunisie Valeurs, who said that the market should continue to grow at a rate comparable to 2017 figures.

Listed Sectors 

Although the best-performing listed sector in the first two months of 2018 was the banking sector, whose sectoral index grew by 11.5% year to date, followed by financial firms with 10.2%, and food and beverages at 6.9%, the insurance sector lost the most value over the period, decreasing by 9.1%, while the building and construction materials sector fell by 1.4%. The banking sector continues to be seen by many as overvalued on the equity market. This is in part due to the artificial boost net profits receive from inadequate provisioning – a situation that has been exacerbated since the central bank’s decision to allow lenders not to provision for non-performing loans in the tourism sector, especially in the years following the 2015 terrorist attacks, up until the end of 2017.

Tighter prudential norms have been incrementally imposed by the central bank, Banque Centrale de Tunisie (BCT), with the aim to achieve full compliance with Basel III norms by 2020. Those norms will likely lead to higher provisioning in the future, which could hinder the sector’s performance in the near term. Despite some potential upcoming challenges, Gargouri Ben Hamadou emphasised the banking sector’s solid growth. “One can invest in the long-term in the healthiest banks within the sector, without fearing a lot of volatility for the next three years,” Gargouri Ben Hamadou told OBG.

According to Neifer, the food and beverages industry is set to continue growing – benefitting from SFBT’s solid and sustainable growth – while the insurance sector’s negative index performance can be explained by the broader economic environment and insurers’ low dividend payout. As for building and construction materials, the sector has suffered from high lending rates, also due to the development of luxury real estate in recent years, which was boosted by Libyan demand until 2014. Since then, local demand has dominated the market.

Overall, according to Tunisie Valeurs’ Gargouri Ben Hamadou, the equity market does not yet reflect the Tunisian economy, as sectors such as telecom, energy, tourism and agriculture, although fundamentally important to the country’s GDP, are not yet represented on the stock exchange.

New Entrants 

The listing of two companies in 2017 – furniture designer and manufacturer Atelier du Meuble Intérieurs on the main equity market, and ceramics producer Sanimed on the alternative market – brought the number of listed companies on each board to 68 and 13, respectively. Atelier du Meuble Intérieurs sold more than 1.2m shares, corresponding to 36.1% of share capital, for TD5.2m (€2m), while Sanimed achieved its goal of raising TD17.1m (€6.6m) in new capital, with its offer 1.5 times oversubscribed. “The fact that only two, relatively small companies entered the market in 2017 shows that more needs to be done in terms of attracting new companies to the BVMT,” Ben Ahmed told OBG. “There are large, solid companies in Tunisia that are not yet listed on the stock exchange, which also speaks to the potential of the market,” he added. “In the meantime, government bonds, which are offering attractive interest rates, are absorbing a large portion of the available liquidity,” according to Salma Zammit Hichri, head of the research and analysis department at brokerage MAC SA.

While no IPOs have officially been announced for 2018, the exchange continues to offer sizeable advantages to those who do choose to enter the BVMT, including fiscal incentives; newly listed companies benefit from a reduced rate of corporate tax of 15% for five years instead of 25-35%. The bourse has been promoting these advantages, specifically targeting the numerous SMEs that compose the majority of Tunisia’s economy (see analysis).

Alternative Market 

Launched in 2007, the alternative market was founded to provide Tunisian SMEs with an alternative source of financing. However, the market has experienced slow growth since its inception, with only 13 listed companies to date, in part because of the lack of active institutional investors on the stock market. “The alternative market should have been limited to institutional investors with long-term investment plans, as the profile of the companies listed on this market requires an acute understanding of the businesses and of their growth prospects in the medium to long term,” Gargouri Ben Hamadou told OBG. To support the development of the alternative board, the BVMT has launched a support programme, financed by both the UK and the African Development Bank, to assist several SMEs through the process of entering the alternative equity market (see analysis).

Demutualisation 

As in many emerging markets, demutualisation of the BVMT could offer a route to attract a larger number of institutional investors; ownership is currently split between the 23 brokerages active on the market. Some business leaders have publicly called for the opening of the institution’s ownership to other institutional and private investors as a means to incentivise greater involvement in the market, as well as improve the market’s governance, competitiveness and innovation. In May 2016 Slim Chaker, then-minister of finance, said the authorities were open to a possible demutualisation of the BVMT. The change in government that occurred in August 2016, however, has likely postponed the project for now.

Regulations 

Currently, the CMF is working to establish transparency and increase the efficiency of the stock exchange, urging listed companies to publish their financial statements on time, for instance, which led to marked improvements in 2017.

In addition, the regulator issued two regulations in 2017: one on money laundering and terrorist financing, and another on breaches of market rules, such as insider trading. These regulations strengthen the supervisory mechanisms in place for all stakeholders in any given transaction. This follows the opening of six enquiries by the CMF throughout 2016 related to potential breaches of the market’s rules.

“The CMF is committed to raising transparency and market efficiency up to international standards, and it is the partnerships we have set up with internationally recognised stock markets and regulators that are helping us in this regard,” Ben Ahmed said.

Brokers 

In 2016 Tunisia had 23 stock brokerages in operation, according to the BVMT. However, the market remained highly concentrated, as the five largest firms – Tunisie Valeurs, MAC SA, BNA Capital, BIAT Capital and Amen Invest – accounted for 68.2% of transactions, or TD2.4bn (€921.5m), up from TD1bn (€384m) in 2015, but down in terms of their share of total transactions, which stood at 73.2% in 2015. “The brokerage market in Tunisia is suffering. At least seven brokers are in deficit, while most brokers have stopped investing in training young analysts due to low activity and uncertainty,” Neifer told OBG. According to Ben Hamadou, the composition of investors is one of the chief constraints to segment growth. “The predominance of retail investors on the market is an obstacle to the development of the brokerage market, while The Tunis Stock Exchange continues to offer sizeable advantages to those that choose to enter, including fiscal incentives: newly listed companies benefit from a reduced rate of corporate tax of 15% for five years instead of 25-35% institutional investors are favouring assets such as government bonds and the currency market, which offer high returns on investment.” While an evolution in the market composition could serve to remedy this, some observers also think top-down reforms are needed. “Given this continuing situation, a far-reaching reform of the sector is necessary to reduce the number of brokers on the market,” Zammit Hichri told OBG. However, as of early 2018, no signs of such a reform were in sight.

Corporate Bond Market 

Tunisia’s primary corporate bond market is dominated by financial institutions, which issued 97.9% of the total trading volume in 2016. For that same year, 20 new bonds were introduced to the market, for a combined value of TD839m (€322.2m), up 26.3% from 2015. While the primary market is relatively well developed, the secondary market is not very active. The corporate bond market is expected to benefit from ongoing liberalisation, supported by a partnership with the European Bank for Reconstruction and Development, which contributed to the launch of Tunisia’s first online yield curve in late 2017. “The yield curve will allow the market to provide more price transparency and visibility over the medium to long term, which is likely to galvanise the corporate bond market,” AlphaMena’s Neifer told OBG.

Islamic Debt 

The launch of new investment products in Tunisia has been under consideration since at least 2016, including corporate Islamic debt, which could help increase the bourse’s contribution to the financing of the economy while also attracting more investment from the Gulf. The promised regulation on sharia-compliant bonds has yet to materialise, in large part because the related 2013 law has not yet been implemented due to alleged contradictions between its provisions and other legal texts already in place. In the meantime, however, the country signed an agreement with Nasdaq Dubai in March 2017, allowing the Tunisian government to issue sukuk (Islamic bonds) on the region’s international financial exchange, although a sukuk has yet to be issued by the Tunisian authorities. In addition, some Islamic banks such as Banque Zitouna have issued participation securities, which are similar to sukuk in principle. MAC SA’s Zammit Hichri proffered that the priority for Tunisia’s stock exchange should be attracting more institutional investors to the market, rather than developing even more sophisticated investment products whose success hinges upon the market presence of the right investors.

Outlook 

Notwithstanding current challenges to the development of Tunisia’s capital markets, including low economic growth figures in recent years, the predominance of retail investors on the bourse and the lack of diversification in listed sectors, the BVMT had a good year in 2017. With economic growth expected to continue to pick up, market observers are cautiously optimistic regarding the development of the country’s capital markets. Both boards promise to be supported by the BVMT’s actions promoting Tunisia’s stock exchange, domestically and internationally, while the regulators increase their efforts to improve transparency and efficiency.