Chapter 1

price/earnings ratio of about 25 in the Tunisian stock mar- panies. The industry has long been subject to restrictive regket
is high compared to average ratios in other emerging ulations that have limited its ability to engage in technical risk
markets which range from 15 to 20. The most recent surge and financial management. Several companies (public and
in the stock market (end 1993-95) has been due primarily private) report cumulative deficits that exceed their authoto
a 2 percent drop in the money market in November 1993 rized capital. In fact, the capital shortfalls of these companies
and a similar drop in term deposit rates, driving investors to exceed the capital of all the other companies so that the indusseek
higher returns on the small stock market. try as a whole suffers from negative equity. The Government
Two reforms that the Government should consider are: is working to prepare and implement a program that would
(1) speeding up the privatization program to increase the reduce the extensive cross subsidization on types of insursupply
of stock offerings, thereby helping to satisfy the excess ance, revise regulations and strengthen supervision, restrucdemand
that is now pushing stock prices up and (2) remov- ture the capital-deficient companies, modernize financial
ing the fiscal distortion that now exists in the form of the size- management, and improve the financial condition and pubable
tax benefit for investors, which encourages investors to lic image of the insurance industry. The Government is also
oversubscribe to initial stock offerings and thereby help to beginning to undertake fundamental reforms of the pension
push the prices up. 9 These reforms would serve to restore a system, by improving the returns on investments of the social
greater balance between supply and demand in the stock security funds and by taking measures to redefine pension
market. But the fact remains that in Tunisia, as in many other benefits and possibly introducing individual capitalization
developing countries with emerging markets, many of the accounts. The objective is to provide basic coverage through
family-owned companies are reluctant to go public. compulsory social security contributions, while additional
coverage could be provided through the insurance industry.
The bond market These reforms in the insurance and social security systems
will have a substantial impact on the availability of instru-
The bond market (primary issue) has also grown rapidly over
the past four years, from total bond issues of TD 176 million
ments and long-term resources for the financial system.
in 1991 to TD 322 million in 1994, as a result of several factors.
On the demand side, tax incentives have prompted the
Conclusions
creation of open-end mutual funds (SICAVs), which are The implementation of competition policies-trade, price
investing in bonds, stocks and T-bills. On the supply side, and investment liberalization, the integration of FDI with
private companies no longer require prior authorization (not the domestic economy, and the deregulation of numerous
automatic under previous regulations) from the Treasury on state controlled activities-is critical to ensuring the future
the timing and pricing of bond issues, although they still competitiveness of the Tunisian economy. The authorities
require a bank guarantee. This gives rise to the risk of moral are strengthening the role of market forces throughout the
hazard, as banks may be willing to guarantee the bond issue economy, but the removal of the controls that remain and a
of a mediocre client, thereby transferring its on-balance sheet more rigorous application of the legal changes recently put
risk to off-balance sheet, but the Government intends to
eliminate this requirement within the next two years when
in place pose major challenges.
independent rating agencies will have been established. An open, competitive economy
Insurance and pension funds Tunisia's membership in the GATT, the WTO, the Maghreb
Customs Union, and an FTA with the EU should ensure
Government authorities are now turning their attention to Tunisia's continued outward orientation. The implementainsurance
and pension fund reform. With total assets of TD tion of trade reforms will be influenced by the pace of com-
600 million in 1992, the insurance industry is important for mercial integration with the EU. The costs of adjustment
the modernization of the financial system and the develop- occur only once, while the benefits of free trade with the
ment of capital markets. About half of the insurance sector is EU are large and recur annually, provided the remaining
state-owned, with the remainder joint stock or mutual com- trade barriers are reduced in the short term (less than five
42 TUNIsIAs GLOBAL INTEGRAION AND SUSTAINABLE DEvELOPMENr. STRATEGIC CHOICES FOR THE 21ST CENTuRY