Colombian Update June 18 : Whats New (s) : President Duque, Real Sector, Oil, Energy.

PRESIDENT DUQUE

Well we have a new President in the shape of Ivan Duque who won by 12% with a 54% share of the vote, wholly predictable after 90% of the press and federations of the country threw their weight behind him after the first round but there is much, much work to do if 2022 isn't to see the start of a new era in Colombia - in time when we have a fuller idea of what his policies are, after all administrations are normally a different reality from campaigns once you take your seat behind the big desk but for now a few observations, some fact, some supposition :

• Once again a healthy turnout versus recent decades and as per the first round violence free - as ever there will be complaints about ballot rigging and payments but that is standard practice in Colombia and whilst sad will not have affected the vote.

• We have the first ever female Vice President in the shape of Marta Lucia Ramirez and whatever way you cut your cloth and whatever you feel about her chameleon movements that has to be a step forward for the women across the country.

• There is genuine fear that this will be Government by committee with ex President Uribe's hand on the tiller alongside a number of other Pantomime villains who have been hovering around the campaign, it remains to be seen but Duque will have a job on his hands to convince onlookers.

• Duque garnered a huge vote in arguably the four most conservative regions, Antioquia (72.5%), Caldas (66%), Santander (60%) & North Santander (Cucuta on the Venezuelan border - 78%) ) - strip those out and it is a different story as he lost heavily in Bogota (41%), Barranquilla (43%) & Cali (43%), the country is still very, very divided.

• Fajardo if he had organized himself properly in the first round would right now be taking the oath come August - his non-alliance with De la Calle has cost him dear, this time around at least. He stayed out of Round 2, as did around 800,000 of his supporters but he is now on the national stage like never before.

• Looking at recent comments from the OECD, IMF, MOODYS etc as well as feedback from my trip to Bogota last week Duque is going to find it very difficult to make a marked difference economically and socially, his populist campaign may have been successful at the ballot box but options such as cutting taxes, VAT free days and such like are not likely to be open to him unless he is incredibly creative.

In summary as stated after Round 1 Colombia has changed forever - there has been a huge shift to the left, a badly flawed socialist candidate got 8 million people to get up on a Sunday and go and vote, I will repeat it again - if this had been a photogenic, Ivy league, humble guy instead of Petro we would be looking at a different scenario at this moment and that is Duque challenge. I will have something specific on the OECD later this week but there is a disturbing chart released by them that reveals that the bottom 10% economically in Colombia will need 11 generations to achieve the mean income of the country - the lowest of 30 countries studied and includes others such as Brazil, South Africa, India & China. This in a nutshell is Ivan Duque's challenge - start moving the needle or represent the last conservative President for some time.

That the easy bit done.... REAL SECTOR It would be all too easy to sit here and tell you that this has been coming for a while but the fact it is at even taking away the advantageous calendar effect the latest retail sales and industrial production data are the consequence of a rapidly improving macro situation as well as growing consumer confidence. The Industrial Production reading of +10.5% jumps out at you and whilst Refining (+8.8%) was again a driver adding 17% of the total increase it would be a mistake to ignore the fact that other sectors such as beverages (+13.7%) and pharmaceuticals (+15.8%) also did well as 34/39 of the sectors were in positive territory, again there is a calendar effect but it doesn’t account for everything. A year ago IP dropped 7.24% and if for fun we look at the March/April blended number to try and clean the Easter calendar effect we get a 2017 average reading across those two months of -2.1% versus a 2018 average of 4.51%, arguably a crude way of doing it but the pattern is clear to see. The Retail Sales number of 6.3% for April is also strong and whilst the bounce in vehicle & motorbike sales (19.2%) accounted for over 33% of all the gain with fuels adding a further 14% there were still positive signs elsewhere with electronics (+22.6%) and food (+3.4%) both making significant contributions. To the downside (but not for the health department) we find that cigarettes and alcohol (-9.5%) were the only drag on numbers. Looking at the same back of the envelope calendar effect bimester calculation we find a combined 2017 average reading of 0.25% versus a 2018 average of 5.9%, once again the pattern is clear. In both of these real sector areas it is clearly too early to declare victory but in both cases the direction at this point appears clear. OIL Whilst there is little to dispute in terms of the favourable oil price thus far in 2018 and the positive impact that could have for the incoming President in terms of a sizeable dividend cheque from Ecopetrol come early 2019 the lack of production thus far this year is disappointing, if not expected. May production stood at 866k boepd which whilst above the target set in the medium-term fiscal framework (840kbpd) and 0.1% above the production recorded in April, is still as modest as the target set. Whilst production YTD averages 854k boepd which is 0.8% above the equivalent run-rate of 2017 it is all too easy to forget that just a few years ago national production was above 1 million barrelsand Ecopetrol alone were discussing their medium term plans to get to the same number, However oil prices collapsed and the knock-on effect was that exploration almost came to a stand still and the net result of that is a struggle to expand production and thereby capitalize on the current 'boom' in prices. Owing to the better prices seen as 2017 progressed there has been an increase in exploration and of course incomes have increased but getting future production anywhere near the levels required to take advantage geo-political tensions, Saudi Arabian IPOs or even the drying of Venezuelan production is going to be a massive challenge - there is much talk of the Gulf of Mexican or even the Colombian Offshore Program but there are those that say the former will be expensive and that the second isn't economically viable, only time will tell on both but for the time being the sector has lost its luster and will need another gap up in prices to make a real difference to the national finances. ENERGY

Of late the news in the energy sector has revolved around the crisis at Hidroituango and the enormous impact that could have on both the local community, Medellin (in the shape of EPM) and the Government's future energy needs but we are taking a rest from that to look briefly at energy demand which once again was in positive territory in May with consumption growing 2.1% YoY, to 5,798GWh, however whilst continuing to rise it is still marginally below the projections of the UPME (Energy Mining Planning Unit).

The most interesting facet is that whilst the regulated demand (residential) grew 0.9%, something that has been a constant, this time around there was a jump in the unregulated market which is dominated by the industrial sector - the increase of 4.6% YoY bodes well for the sector which as we see above had a very healthy April.

Hidroituango will supply 15-17% of Colombia's total demand as and when it comes on-stream however the country continues to do very well - the heavy rainfalls that ironically caused issues at Ituango have also succeeded in improving the useful reserves in the reservoirs, they are now at 67% of their utilization rate as opposed to 47% on April. Finally to highlight the sustainable nature of Colombia's energy system fully 85% of May's supply came from the many reservoirs dotted around the country.