Flash Report /

Tunisia: Populism and weak post-election coalition risks reform (and IMF loan)

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    4 August 2019
    Published by

    Tunisia presidential and parliamentary elections are scheduled for 15 September and 6 October, respectively. Presidential candidate registrations started on 2 August. While the elections should further entrench Tunisia's post-2011 democracy, there is significant risk to continuation of economic reforms, and, to a lesser extent, the IMF program (4-year extended fund facility of US$2.9bn until May 2020) and the other external assistance contingent on that program.

    This is because of the challenges faced by the two parties that have effectively run government since the 2014 election and are implementing the economic reforms required by the IMF: Nidaa Tounes and Ennadha. This is a result of internal changes (disunity in the case of Nidaa Tounes and a less gradualist approach to politics in the case of Ennadha) and external factors (the weak economy and populist candidates tapping in to the discontent resulting from this).

    Investors in Tunisia's US$ sovereign credit appear to be reflecting this concern much more than those in local currency equities. 

    Credit investors are seemingly more attuned to these risks than equity investors

    Z-spreads on the 2025 US$ sovereign bonds, relative to EMBI, are significantly wider compared to just prior to the end-November 2016 external investor conference (about 220bp currently versus 100bp back then). However, equity valuation is at a similar level: 

    • The local index (Tunis SE) is on trailing PB of 2.4x (versus 2.4x in Nov 2016); 
    • The largest stock (SFBT in consumer) is on trailing PE of 18x (versus 15x); and
    • The largest bank (BIAT) is on trailing PB of 1.6x (versus 1.7x). 

    The November 2016 conference mobilised cUS$17bn of loan and FDI pledges, equivalent to c40% of annual nominal GDP or 60% of gross government debt at the time.

    Challenges from populist candidates for Tunisia's incumbent parties

    Presidential candidates have until 9 August to register and should be confirmed by 31 August. The backdrop is one of high unemployment, divisions among those parties representative of interests aligned with the pre-2011 regime, changing electoral tactics by the leaders of the moderate Islamists, and the emergence of populist candidates (either keen on regressing some of the economic reform commitments made to the IMF or on reforming the entire constitution). 

    • Nidaa Tounes, the party of recently deceased President Beji Caid Essebsi, has fractured into two; the breakaway Tahya Tounes party, led by the PM Chahed, and the remaining party, led by Essebsi's son (Hafedh).
    • Ennadha, the moderate Islamist party, is led by Ghannouchi, who has registered to contest the parliamentary election (making him a potential coalition PM candidate) and by Morou, who has hinted he may enter the presidential contest (Ennadha did not field a candidate for fear of repeating the tactical mistake of the Muslim Brotherhood-aligned Freedom and Justice Party in Egypt when they pushed for power too quickly for domestic and regional vested interests).
    • The unions (UGTT) successfully protested at the start of the year for higher wages and hinted that they may participate more formally in politics; public sector workers make up 20% of all jobs, public sector wages are 15% of GDP and half of the fiscal budget). 
    • The new electoral law, which may have blocked candidates from outside the established political parties, received parliamentary approval in June 2019 but lapsed after the death of Essebsi (who did not sign the bill into law). Candidates, such as populist media-owner Karoui (who led the last poll allowed prior to the formal start of the election process), are now in the mix and may dilute the vote bank of the established parties (Karoui was previously affiliated with the Hafedh Essebsi faction in Nidaa Tounes). Given Essebsi's death brought forward the presidential election to before the parliamentary one, this may also impact the composition of the ultimate government (if a presidential loss for an established party erodes its prospects in the parliamentary election).

    Tunisia is still one of our least preferred equity markets

    Tunisia remains near the bottom of our global ranking of frontier and small emerging equity markets. 

    • Politics is not sufficiently supportive of necessary economic reforms (and upcoming elections likely exacerbate this).
    • Growth in the EU (the main market for exports, remittances and tourists) is anaemic.
    • Security risks are likely to persist given the deep economic divide between coastal and rural areas, the legacy of 20% of expatriate Daesh fighters in Iraq and Syria emanating from Tunisia, and the instability in neighbouring Libya and Algeria.
    • Valuation, top-down, is not compelling with trailing PB and PE for the local index (Tunis SE) merely at par with the 5-year median.

    See these previously published reports:  

    Tunisia: Too divided to reform, external vulnerability masked by IMF loan, May 2018

    Beggars Banquet: Fund strategy and top market picks in FM and small EM, June 2019

    High polling figures for populist Karoui, who is not directly representing an established party

    Source: Emrhod Consulting, Tellimer Research

    Nidaa Tounes and Ennadha governed Tunisia after the 2014 election

    Source: IAHE

    Economic gains have not followed democratic ones

    Source: IMF, IRI

    Equity investors do not appear to be on the same page as credit investors

    Source: Bloomberg