Colombian Update July 25th : What's New (s) - Tax Reform, Survey, Economic Activity.

A FAIRER DEAL ?

Last week a proposal surfaced from the National Union Council and which was directed at incoming President Duque that the level at which income tax should be levied should start at 2.5x minimum wage (approx USD860) as opposed to the current level of 4.1x (USD1,410) and this has caused social network rumblings amongst the socialists - sometimes these same networks have some very valid points but on this occasion they have less legs to stand on than Long John Silver. To add a little equality the same report also suggests that the 53,000 people currently receiving pensions of over USD2,064 should also be taxed and again our preferred pirate comes to mind. The report cites the Commission of Experts for the Tax Equality and Competitiveness (2016) and argues that as opposed to the OECD (28%) and Latam (64%) in Colombia corporation account for 83% of the tax contributions, clearly a less than ideal situation. Continuing only 9.5% of Colombians declare tax and 80% have a full exemption - this is low by any standards and is accounted for by the fact that Colombia’s minimum threshold for tax is 2x the Latam average and 12x than of the OECD. There are historical arguments to paying taxes, in general related to the fact that the intolerable level of Government corruption means people never see anything for the taxes they pay, but that is fast becoming an excuse - the public health system here (EPS) may not be up to the tremendous private system but it is has one of the highest coverage levels to be found amongst emerging markets and those who use that system should be contributing. No one is suggesting 30% or even 10% tax but a ‘contribution to society’ even it is 0.001% is needed, the figure is irrelevant the contribution and discipline of supporting the state is everything. Once you actually contribute you actually have a full right to complain when you can’t find schooling or a particular operation - at the moment those complaints are rarely heard. Such proposals are hardly shrink wrap new, in the most recent tax reform (Dec 2016) the Government initially wanted to expand the tax base but scare tactics from the ‘No’ campaign during the plebiscite actually meant it was dropped from the list of proposals - but what is clear is that then as well as now it is time to have more people contribute. This is in turn should help take some of the burdens off of the corporations as well as ease the resentment level amongst the rich who see themselves as paying for everything. Having established my view that the less fortunate should pay more another facet of the last tax reform that was also mothballed was a close looker at land taxes and this is another area that should be looked at - as we saw on Monday’s Canada blog agriculture considering all the climatic advantages Colombia enjoys contributes far too little to GDP and this is at least in part due to the illegal land grabbing that has taken place over the pace few decades - according to Oxfam 43% of the largest rural landowners cannot account for the origins of their property. There are massive tracts of land that are lying unused and largely untaxed - they need to be used or taxed. So is reform is needed in order to lower the corporate burden, that much is obvious and has been mentioned by multiple international agencies however the reform needs to be equitable, everyone should be contributing to some extent and once you have that situation those who are avoiding payments should be next on the list. President to be Duque has made mention of Blockchain and such systems which sound very good on the hustings but the reality is that Colombia isn’t yet ready for such systems and instead the priority should be directed towards more basic adjustments. SURVEY The latest look at analysts expectations from Fedesarrollo revealed few changes in terms of medium term outlook with 100% of analysts of expecting no change to the Repo rate this month and the same 4.25% being seen as the exit rate for 2018 - in fact looking further out they forsee no more than a 25bps rise to 4.50% by the end of 2019. In terms of growth there was a slight adjustment upwards for 2Q from 2.4-2.5% which also moved the FY reading for 2018 up by 10bps to 2.6%, still below both the Central Bank and FiniMin estimates of 2.7% which for my money will both be slightly shy of the actual number - if external events don't overtake those locally. In terms of inflation there is little change to the YE18 number at 3.37% - from there out little change is expected through to July 2019 (3.42%) and even on to the end of the forthcoming year when a rate of 3.40% is anticipated. In terms of the markets the Peso is not expected to do great things over the coming 18 months with a 2900 exit rate for 2018 and 2940 in 2019 - that latter estimate especially can be at best considered as guesswork, there are too many external factors impacting the oil barrel for anyone to really know. The 2024 benchmark bond is expected by almost all analysts to remain above 6% for the next three months - it is currently trading around 6.17%. Finally the COLCAP sees 76.3% of analysts expecting an increase over the next quarter (up 12% MoM) with 10.5% of them agreeing with myself that the increase wil be between 5% & 9.99% - sadly the Colombian equity market has rarely done what is expected of it. In terms of top picks we have in order GEB (even though the survey still says EEB), Exito, Grupo Sura & Nutresa (the last three all tied) with holding & consumer companies being the sectors of choice - energy has slipped somewhat out of favour. The only doubt I have here is GEB - there is a 10% upside to the average analyst price target but there is also a USD1.2bn issuance to be negotiated which will limit the upside in the short term even if it is placed with no problem. ECONOMIC ACTIVITY The latest ISE reading for May of 2.40% was arguably lower than the market expected however put into context of the past couple of years it is a decent enough number even though it was lower than May 17 (3.85%) and last month when we had a reading of 3.54%. The overall economy may have turned the corner however many sectors are still finding their feet and preparing themselves for what the new Government will bring in two weeks time - expectations are high for those involved in the industrial and commercial sectors however converting campaign promises on taxes etc will as ever prove more difficult when it comes to putting theory into practice especially in a bureacracy driven country such as Colombia.