Whilst most of the region's stock markets have been keen to woo institutional money from overseas investors, Tunisia has bucked the trend and kept the doors of its bourse firmly shut. Andrew Album continues our series of reports on the region's stockmarkets.

The Tunisian stock exchange, claims

its president Ahmed Hadouej, "is first in the Arab world from the point of view of organisation." Indeed, with a privatised exchange and a nascent securities watchdog, the Commission des Marches Financiers, Tunis is ahead of many of its neighbours. "Show me another Arab country that has this," challenges Hadouej, "as well as prospectuses, bonds, equities and mutual funds."

The growth and development of this Maghreb market has indeed been impressive. Originally founded in 1989, the bourse has expanded rapidly. Turnover has risen from a paltry $12 million in 1990, to $296 million in 1994 and the market's capitalisation has soared to over $2.5 billion, according to the IFC's Emerging Markets database.

The rise in demand for shares that this increased interest has fuelled has not, however, been matched by a comparable increase in the number of quoted companies. Indeed, with only twenty five companies currently being listed, it is not surprising that the supply/demand disequilibrium has triggered a surge in prices. In 1994, the market doubled and followed this up with a further 25% rise in the first half of 1995, before levelling out for much of the remainder of the year. "One hundred per cent growth can be a cause for concern," concedes Hadouej. In spite of the calmer situation which prevailed towards the end of 1995, many see the Tunisian market being fully valued in comparison to other countries in the region, with price earnings rations being in the low 20s.

The rise in domestic demand for equities can be traced back to 1990, when the government initiated a package of measures designed to stimulate interest in the stock exchange as a means of bolstering the country's savings rate. Individual investors were enticed by an exemption on dividends and capital gains, as well as tax relief on income invested in shares.

Coupled with these incentives aimed at producing a new class of investor were moves to develop a professional exchange and suitable vehicles for investment. Experts from the French stock exchange provided assistance in the establishment of a trading system, the licensing of brokers and the development of mutual funds. There are now over twenty mutual funds in existence, which between them manage half a billion dollars in assets, equivalent to about one fifth of the value of the stock market.

A bond market has also been created, ostensibly to enable Tunisian corporations to raise loan finance from non-banking sources. In 1994, there were over 20 new bond issues and this market continues to thrive. Local brokers are dismissive, however, pointing out that companies which issue bonds need to do so with a bank guarantee to support them. So, rather than assessing the security of the company issuing the instrument, investors are only concerned with the strength of the financial institution which provides the guarantee. Complains one local broker, "it is all decor because there is no competition between banks and the financial market."

Gradually, the lack of new issues on the equity market is being addressed. The Government has made no secret of the fact that it wants to encourage private companies to raise capital via the stock exchange. The climate for new issues is more favourable than it was in the past, due to four key factors.

The first is that corporation tax rates have been reduced, thus encouraging local businesses, which have preferred to keep their dealings away from the watchful eyes of the local tax authorities, to be less secretive.

Secondly, rising interest rates - commercial banks tend to charge 12% and development banks several percent more - have made equities seem cheap by comparison. Divided yields tend to be much lower, which is of considerable benefit to businesses trying to manage cash flow, as investors are seeking returns in the form of capital growth, in addition to income from dividends.

Thirdly, domestic banks have been forced to reform and tighten up their lending procedures. "Until 1990," says Hassine Trad, who runs a local brokerage, "private companies here had very little capital and lived off bank loans. But, when the banks were required to conform to international norms and maintain proper ratio of their own funds to debt, they had to become more prudent in their lending." This move forced many companies to turn to the Tunis exchange in order to raise finance.

Trad claims that this process will intensify due to its success. In particular, he points to the fact that many business owners have come to realise that stock market listings have not really served to dilute their control of their companies, which is what many had previously feared would happen. Adel Dajani, co-founder of the recently formed International Maghreb Merchant Bank agrees. "Companies are beginning to see the benefits of going public," he says.

The final reason for this development has been the introduction of tax incentives which encourage Tunisian firms to establish investment companies which then inject money into group companies. These investment firms can then seek a stock market listing. It has been claimed that almost ninety firms, which between them manage some $330 million of funds, are seeking to follow this path.

As crucial to the development of both Tunisia's stock market and its economy in general is the progress of the government's privatisation programme. The Tunisian government is faced by the same dilemma that confronts other countries which are contemplating selling-off state owned businesses. On the one hand, privatisations serve as a catalyst for the development of a dynamic wealth-creating private sector. As many other countries will testify, loss-making enterprises which had become synonymous with inefficiency, corruption and nepotism can be successfully turned around, once out of state ownership.

However, the fruits of this process come at a cost - the restructuring of businesses which the process demands can result in a sharp upturn in unemployment with the attendant social dislocation that this results in. Fearful of developments in neighbouring Algeria, where Islamic fundamentalists have gained in support, Tunisian privatisation has the country's innate characteristic of caution stamped all over it.

Between 1986 and 1994, some 43 companies were sold off, out of a total of 400 fully and partly owned state enterprises. To date, US $176 million has been raised for the Treasury, although the government is quick to point out that it does not view the process simply as a revenue-raising exercise. As a report by UK-based ratings agency IBCA points out, this was barely half of the target which the authorities had originally set themselves. And with almost half of those successes being in the tourism sector, the process had barely touched core nationalised industries.

Government officials are often defensive when challenged on the issue. "For us, privatisation is not an ideological issue, it is pragmatic," says one, who defends the slow pace of progress by claiming that "the advantage of going slowly is that we learn along the way and we allow people to gain experience with the concept of the stock market."

Taoufik Baccar, Minister for Economic Development, adds another reason for the tardiness - the government is keen that public monopolies should not be replaced by private ones, he says. His insistence that the government remains committed to the process is borne out by last year's developments. Fifteen enterprises were sold off - three times the average - and the prospects for the remainder of 1996 are even more encouraging.

Furthermore, several key businesses had a proportion of their equity sold on the stock exchange. For instance, the issue of a 15% stake in the national carrier Tunis Air, in July 1995, attracted 137,000 shareholders (out of a total population of 8.7 million). Furthermore, the flotation of shares in the local supermarket joint venture, Monoprix, was seven times oversubscribed and the company now has 23,000 shareholders. This gradual increase in supply has finally spurred the authorities to contemplate opening the exchange to overseas buyers. To date, foreign equity investors have been virtually shunned, with central bank approval having been a precondition for the purchase of shares. The result is that overseas investors hold on only a fraction of the market.