Colombian Update June 29th : Whats New (s) : Unemployment, Financial Sector, Venezuela.

IT'S NOT COLOMBIA IT'S CANADA

So after yesterday's proceedings we have a nightmare scenario (for some) of England v's Colombia in the next round of the World Cup and I will accordingly be departing for Toronto this coming Sunday and that may be the best place to be, any tips for an English bar very welcome. If we lose the locals will have 3 weeks to get over it before my return and if we win...my memory is up there with a Bottlenose Dolphin, my only fear should things not go to plan is that my overseas roaming plan will be burnt through within minutes. UNEMPLOYMENT The UB40 data was released by the DANE and the tendency is very stable when we look at the 13 cities urban metrics which most prefer - despite many fearing that 2018 might represent a challenging we once saw a very modest decline with 10.1% versus the 10.2% seen for the same month in 2017. All the time it is worth remembering that this is against the constant steady drift of the population towards the cities - a tendency that will not change until someone takes a serious look at the agriculture sector and convinces people that there is a future in the countryside however that will need land reform of some description because whilst 81% of the rural land is owned by 1% of the population (OXFAM) it is hard to foresee change. Whilst I have always been dubious as to the accuracy of any employment statistics collected in emerging market countries owing to the ongoing suspicion amongst the poorer economically in society that declaring their work will somehow be financially harmful I am equally dubious as to just how bad the situation is in Colombia especially when we compare economic statistics with national surveys. Ever since I set foot in Colombia each and every survey regardless of who is polling or making the calls have seen the population complaining about the employment situation however the reality says differently. Starting with the Urban data we find that when comparable records began at the outset of 2001 we were looking at urban population of 17.41mn which has risen by 26.4% to 22.02mn by May 2018 - during that period we find that urban unemployment has dropped from 20.1% to 10.1%, perhaps a better apples-apples the equivalent May reading for 2001 was 17.9%. Moving to National numbers this month saw a record number of people working with 22.45mn earning a wage of some description which as a crude number represents 46.46% of the total population - back in May 2001 that number was 38.35%. In terms of the last 8 years it has also been a successful period for the authorities with the population having risen 10.15% since Juan Manuel Santos came to office whilst unemployment has come down in both Urban and National terms, The challenge going forward given the very young demographics of Colombia and the students pouring out of schools and universities is to find work for these young people whilst trying to avoid downward wage pressure due to the oversupply in the labour market. That would be good for employers but could cause discontent - it is a quandary for sure but at least the improving economic conditions will help with the situation.

VENEZUELA As many know I consider that the neighbouring country is a potential 'Grey Swan' for Colombia - it cannot be black because it has been discussed however the impact of any downfall of our favourite bus driver would surely be enormous on Colombia.

• We are all descended from Gran Colombia with innumerable numbers of both countries living on the other side of the border.

• A decade ago Venezuela represented 18% of total Colombian exports - now they hardly register.

There can be no questioning the impact medium term of a free market Venezuela, in the short term it would be very limited and artisanal in some respects but the commercial routes would be open in very short order, food, textiles, vehicles and financial services have historically been some of the strong areas, others would be added to that list. As if to support this argument I just came across a MOODYs report which looks at the impact on the Colombian economy, GDP specifically, if the wheels fall of Maduro's bus and they are bullish. With the driver remaining at the wheel for the whole of his mandate through 2023 the agency are predicting 2019 & 2020 GDP growth for Colombia of 3.4% & 3.9% respectively with an average of 3.9% through 2023 however if Maduro does not complete his mandate they are estimating 3.9% for 2019 and 4.2% in 2020 this time with an average of 4.1% until 2023. Under a more negative scenario if Maduro manages to increase his power further (what more does a man need ?) we are looking at 3.1% & 3.7% for the aforementioned years and a 3.8% average. At this point MOODYs are ascribing a 50% possibility to his remaining until 2023, 20% that he grabs further power and 30% that he chokes on his cornflakes or leaves to live in Antartica with the penguins - I have embellished a little on the final point, perhaps he will simply decide to retire to run a corner shop. There are other considerations of course :

The flow of Venezuelans into other countries would be stemmed - Colombia is the biggest recipient of economic and political migrants with a significant if not game changing effect on public finances. Venezuela has a drag on the Colombian economy when it used to be value added - that would certainly be reversed if goods start pouring over the border.

Finally a note of caution - the border would have to be handled very carefully post Maduro to avoid the total free movement of Venezuelans who potentially can't leave at this moment but who would like to given the opportunity and finally if we do see the rebirth of a free economy next door that there isn't a negative impact on domestic inflation. I remember listening to the great Dario Uribe in Cartagena (2006 or 2007) at the then Bear Stearns conference declaring that Venezuela at that moment was responsible directly or indirectly for 70% of the inflation in the Colombian system, a number that has stuck with me forever, FINANCIAL SECTOR

Finally for today a look at what the April told us about how the banks and other financial institutions are currently progressing. In short they are still moving in the right direction but progress is slow - profits were up YoY however the commercial sector is still dragging but there is improving news on NPLs and as I have told many investors the banks will be a good pick up when the NPLs finally start to turn around. The overall loan portfolio expanded 5.7% nominally in April (2.5% real) which is down slightly on the expansion rates experienced in March - business loans were up just 2.8% nominal which in real terms was down 0.4%, this is nothing new but in March we had been some modest expansion - of course the commercial sector represents over half of the overall portfolio and has a large impact. Looking a the other sectors we find both consumer and mortgages still in positive territory and the mortgage business for me has been a stand out performer during all of this economic slowdown. Getting to those NPLs well they are still rising, 25.2%, but at a much lower rate than both March and April 2017 (34.4%) and this is to be expected in any economy that is marching in the right direction. Average ROEs (12.19%) are increasing slowly but there is still a lot of work to be done by the banks especially in the commercial sector - they have been badly scarred from the hits taken over the past two years, massive loans that have gone sour - they are of course in the process of trying to recuperate those situations but provisions have leapt and affected numbers but hopefully the rising tide of the economy will lift all the banking boats.