Key takeouts

• Tunisia’s stock exchange, the Bourse des Valeurs Mobilières de Tunis, is one of Africa’s broadest, with 80 listed companies and new entrants in education and healthcare.
• Structural challenges, including political instability, debt burdens, and government-controlled pricing, constrain economic growth.
• Recent tax hikes will impact corporate earnings, but the market remains sceptical about their longevity.
• Tunisian companies provide indirect access to Algeria, Africa’s fourth-largest economy, which lacks its own stock exchange.
• Despite an interesting landscape, Old Mutual African Frontiers Strategy currently has no direct exposure due to unattractive valuations and currency risks.

Tunisia’s market: A hidden but challenging frontier

When people think of African markets, Tunisia may not be the first country that comes to mind. Yet, for investors in the listed space, it plays a vital role in the continent’s diverse and evolving investment landscape. The Bourse des Valeurs Mobilières de Tunis, with 80 listed companies, offers one of the continent’s broadest exchanges. While visiting Tunisia we met with two companies looking to list, one in education and the other in healthcare.

Tunisia, Africa’s northernmost country, like the southernmost country, has been an economic disappointment. Economic growth has averaged less than 1% in both Tunisia and South Africa. By contracts, Senegal has averaged more than 5% and Kenya around 4.5% per year. It is often difficult to pinpoint the reasons for lacklustre progress. Some of the contributors include:

• Political instability, e.g. the 2011 Arab Spring started in Tunisia
• Drought – Tunisia is one of the world’s largest olive oil producers
• High external debt levels have limited the government’s ability to invest in growth promoting activities
• Overbearing government regulations, which provide a level of protection from competition but make it challenging for companies to grow, thrive and innovate

The influence the government has is significant, things like the price of bread, milk and fuel is regulated. Délice, a listed dairy company, reports a negative gross margin because it sells milk for less than it buys the raw milk from the farmers. Interestingly, the price it buys it from the farmers is also regulated. To turn a profit, it then claims a subsidy from the government. As with many African governments, getting paid can often be a drawn-out process.

Macro trends and market sentiment

In the short-term Tunisia’s economy is expected to continue to struggle. It is a country where payment by cheques is still very prevalent but will be phased out this year to go digital. Cheques play a big role in the lending market. When one borrows money in Tunisia future dated cheques are written and cashed over the maturity of the bond. Given that defaulting a cheque is sentenced with prison time, cheques provide a high degree of security to lenders. With cheques falling away, loan disbursement is likely to slow in the short term. Borrowing promotes spending, which boosts an economy. In fact, the government itself is struggling to borrow, given it is already at a high level which means less investment to drive growth.

When countries get overindebted they often turn to the International Monetary Fund (IMF) for assistance. Tunisia’s president has come out strongly, saying the country will not seek an IMF programme. Instead, the government announced that it will be raising tax rates. Individual tax rate will rise to 45%, banks corporate tax from 30% to 40% and for consumer companies from 15% to 25%. This will knock earnings by 10% to 15%. Interestingly, the local market does not seem to believe the taxes adjustments will stick, as share prices have not reflected the weaker earnings since the announcement.

But Tunisia is not just about itself. Tunisian companies give investors access to Algeria, Africa’s fourth largest economy (behind South Africa, Nigeria, and Egypt). Exposure to Algeria is typically difficult to gain, but there are a number of listed Tunisian companies that operate in Algeria. Examples would be One Tech (electronic goods distributor), Poulina (an agri-food business) and Lilas (home and personal care manufacturer).

Portfolio implications: Why we are watching, not investing

Currently, the Old Mutual African Frontiers Strategy has no direct exposure to Tunisia. Valuations are not attractive, and while we expect the currency to be stable in the short term, there are many factors suggesting a meaningful currency correction is possible in the medium term.

Tunisia fast facts:

• A leader in women’s rights in the Arab world (under leader Habib Bourguiba from 1957 to 1987)
• Scenes from Star Wars were filmed in Tunisia
• Over years Tunisia has been colonised by Phoenicians, the Carthaginians, Romans, Vandals, Byzantines, Arabs, Berbers and Ottomans. It was most recently a French protectorate
• A Tunisian street vendor who set himself alight sparked the Arab Spring, sending President Ben Ali into exile after 23 years of power
• Main agricultural products: olives, citrus, grapes, melons and figs

Investing in Africa requires patience, discipline, and a deep understanding of each market’s unique challenges and opportunities. Tunisia is no exception.