Colombian Update June 25 : Whats New (s) : Markets, GEB.

MARKETS

Well it is the morning after the night before in Russia and Colombia’s World Cup hopes, as well as those in the commercial sector hoping for more than a two week spike in sales, are alive and kicking. As for those of us feasting on bacon butties and in some cases G&Ts at 7am, a nice little rout of Panama helped nicely with the atmosphere. It is also the week after the Sunday before when Ivan Duque was elected as President and whilst he has been busy pressing the flesh and making TV appearances none of the bitterness from the campaign has receded, his every word is being analyzed and that is likely to be the case until 2022. The next locking of horns will be the 7 question referendum on Congress pay which will take place in August - I mean really who wouldn't vote for a Congress awash with corruption to have its salaries and benefits cut ? The opposition will no doubt paint Duque as representing the establishment and it is true that the main parties up until campaigning began were against any such a vote so he will need to be careful not to leave the door open to accusations of cronyism as the referendum takes place shortly after he takes office. However whilst the pro business/markets candidate has been busy the capital markets have not been doing the same - in fact they have done less than zero, there was no post election relief rally after Petro the bogeyman was vanquished which perhaps shouldn’t be a surprise on a few fronts.

1. Any rally should have come already, outside of Petro’s most loyal supporters there were few who truly believed he would win - therefore markets players in reality should have got busy already, so now what’s the hurry ? Maybe wait and see what concrete proposals appear first ?

2. A somewhat intangible factor which is hard to calculate is how long it will take those investors who panicked at the Petro factor and shipped their money overseas will need to repatriate it - in the case of ETFs they will need to be liquidated, other instruments will have a lock up period and in the case of Miami property perhaps never - those charging commission and perhaps responsible for some of the scare mongering in the first place, will be happy enough to help them.

3. As mentioned recently the market is undervalued and should move firmly upwards as 2018 continues however as mentioned in the same bullish report one thing to look out for are external events and for sure Mr POTUS is as out there as anyone else on the planet - until such time as the global trade heavyweights come to some sort of agreement it will be hard for any market to make headway, on top of that this weekend’s comments from OPEC will also potentially place both the Peso and Ecopetrol under a little pressure even though no numbers were mentioned with regards to the oil output increase.

4. Another external factor that has been around for a while is the mysterious world of the MSCI, juggling the Chinese conundrum, deciding whether Preference or Ordinary shares are more valuable and then this past weekend deciding that Argentina can rejoin the Emerging Market club - as per normal with the MSCI's policy there is little in terms of numbers, methodology or dates but at some point this will chip away at some of Colombia’s weighting.

Therefore don’t be surprised by the lack of upward mobility but at the same time don’t despair, the economy is in good shape and getting better whilst any reforms the new President is likely to try and make should be pro-market. The other good news is that the World Cup is progressing and now approaching the midway stage - after people have stopped kicking a ball around perhaps locals will get a little more hands on. EEB/PROMIGAS Over the past few days the press reported that the City of Bogota are edging closer to their sale of 20% of GEB, the municipality currently owns 76.3% of the energy transmission company but is looking to sell that down in order to raise badly needed funds for infrastructure projects such as the long awaited (today's understatement) Metro, whilst not decades behind schedule like the metro there has already been some slippage in the sale process which is being handled by BTG & BoA. This is a massive (US$1.2bn) undertaking for three major reasons which have nothing to do with EEB itself, a fine company which has extensive operations in Colombia as well as Brazil, Peru etc, however there are factors that are beyond their control.

1. The first issue will be the fact that 56.3% of the company will remain in the hands of the district, you could argue that Ecopetrol or ISA are in a somewhat similar situation but there is a vast difference between a sovereign Government as a partner and the Mayor of Bogota - we had some very unreliable characters sat in that office over the past decade and their capacity to control the Unions will be just one concern, the fact that in around 18 months after the sale we will have new Mayor will be in the back of people's minds - especially as the socialists dominated the space during the elections.

2. Already this year we had the secondary issuance from Celsia which was very successful, it was a different structure of course but it is juxtaposed nicely as it is 100% private sector and will have potentially drained some of the demand away from GEB.

3. Local AFPs at the beginning of the year were very close to their limits when it comes to GEB and whilst they have been selling down their positions their appetite might akin to any of us after several hours at the dinner table - you know that dessert looks good but you just don't have room for a morsel more - and those AFPs, as per any local issuance, will be key players. Normally, as per all funds globally, the way to entice them in is an appetizing discount (perhaps the green tea to help with the digestion of that dessert) but as per all public sales here that is complicated by regulation which makes it difficult and indeed hazardous for the executives of the District themselves - Round 1 was placed at COP2018 which is a discount of 0.83% to today's price and has set the benchmark.

The overseas roadshow has already been completed, searching far and wide for investors however the message would have been on both sides that perhaps waiting for an election result would be a good idea - now we have a market friendly candidate it is full steam ahead, it appears that the paperwork is in place and that now it is in the Mayor's hands but there are hopes for an August sale

One disappointment in all of this is GEB's sale of the 16% they hold in Promigas which continues to be hawked around the planet - this has been going on much longer than anticipated and it would have much more advantageous to the markets if this stake (US$300mn minimum) had been sold via an open auction in to the market with a US$20mn maximum stake. The BVC is crying our for new blood, the stock is already listed and much admired and there is a genuine opportunity to add another liquid name to the stock market, in the end small local players who have followed Promigas for some time will surely be much more willing to buy than a strategic investor who will have little day in the company's future.