South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
Tunisian stock market exposed by pre-election political fragmentation
Either the equity or the credit markets are mispricing the risks facing Tunisia as the fledgling democracy prepares for presidential and parliamentary elections on September 15 and October 6.
Credit markets are telling a more realistic story, Hasnain Malik, head of equity research at Tellimer in Dubai, argued in a note on August 4.
Spreads on 2025 US dollar sovereign bonds are significantly wider compared with November 2016, Malik writes. Yet equity valuations are at a similar level.
- Valued on price to book and price to earnings ratios, the Tunisian benchmark index remains in line with its five-year average.
- The largest consumer stock, the drinks company SFBT, is now more expensive than in late 2016 with a price/earnings ratio over 18 versus 15.
- The largest bank, BIAT, has become only marginally cheaper in that period on a price-to-book basis.
Politics is not sufficiently supportive of necessary economic reforms, and the elections are likely to exacerbate this, Malik argues.
- The unions successfully protested at the start of the year for higher wages and their political clout may increase.
- Public sector workers make up 20% of all jobs; public sector wages are 15% of GDP and half of the fiscal budget.
Meanwhile, growth in the EU (the main market for exports, remittances and tourists) is anaemic, Tellimer says.
- Security risks are likely to persist given the deep economic divide between coastal and rural areas, and instability in neighbouring Libya and Algeria.
- Tunisia remains near the bottom of Tellimer’s global ranking of frontier and small emerging equity markets
The credit markets reflect what international investors fear about the elections, while the equity market is driven by local investors, argues Charles Robertson, chief economist at Renaissance Capital in London. If the elections go well and reforms are accelerated, Tunisia could be one of the best performing countries in Africa, he says.
- “But that would be a multi-year process, and there’s no need to take a gamble on an election result ahead of time.”
- Investors will need two or three years of stability before they start to invest, so on a best-case scenario, FDI could start to increase in 2022, he says.
The path to such a scenario is currently lacking. The historian of Tunisia Sophie Bessis has argued that there is no presidential candidate capable of commanding a clear consensus. The only common factor between the roughly 30 contenders is that none are likely to be able to solve the country’s economic problems, she writes in Jeune Afrique on September 4.
In the final days before his death on July 25, President Beji Caid Essebsi refused to sign legislation that would have barred some candidates from running. Zachary Burk, an associate analyst with Eurasia Group in London, says that the incarceration of likely frontrunner Nabil Karoui has increased tension in the streets, fanned inflammatory rhetoric among the political class.
- Burk expects a “complicated judicial battle that could polarize Tunisians” should Karoui make it to the second round.
- The elections seem unlikely to significantly improve the fragmentation within the future governmental coalition, which has been a central problem harming the government’s ability to deal effectively with entrenched business interests and trade unions, Burk says.
- Still, “it is difficult to imagine any future government significantly changing the shape of the relationship with the IMF.”
“Tunisia’s politicians have shown a knack for muddling through to preserve stability when push comes to shove,” Burk argues. “Populist parties are unlikely to gain a majority and populist presidential candidates’ true economic policy orientations are still unclear. They are likely to be constrained by Tunisia’s macro-economic realities and more orthodox parties to a large extent.”
Jason Tuvey, senior emerging markets economist at Capital Economics in London, is “pretty downbeat” on Tunisia’s economic prospects. “Whoever wins the upcoming elections faces a tough challenge addressing the country’s large economic imbalances,” he says.
- The IMF agreement will remain intact, but the authorities will need to tighten fiscal policy aggressively and allow the dinar to weaken to help rein in twin budget and current account deficits, Tuvey says.
- Inflation is likely to remain high and the central bank will probably hike interest rates further.
- Against this backdrop, Capital Economics expects GDP growth to slow in 2020-21.
Bottom Line: The odds are loaded against investors in Tunisia’s stock markets unless and until political stability is established.