Colombian Update August 30th : What's New (S) : Taxes, Oil, Construction Et Al...

DISTRACTED

What is is about being unemployed that give the illusion that you have less time to get things done - anyway between Referendums, Agricultural Events and GDP data there has been a lot of news slipping through under the radar and whilst none of it individually is market moving when grouped together one does start to wonder just when the tempo of the markets will pick up - Labor Day is fast approaching but over recent years that has been a catalyst for basically nothing. Below is a brief synopsis of the main news over the last week or so.....on Friday (tomorrow) of course we have the Central Bank sitting down and whilst the most recent CPI number was very benign indeed one imagines will be left at 4.25%.....although there surely is a little wiggle room ? TAXES Much ado about...actually about quite a lot at this years Asobancaria event in Cartagena - I may have slept in or been watching Netflix on the other channel but prior to last week I appear to have missed the part where there would be a new VAT tax to go along with the widening of the tax base, FinMin Carrasquilla has certainly woken up many people. My immediate reaction is the poor old emerging middle class are going to get it in the neck - whilst the proposed expansion of the tax base will have a couple of million extra paying tax at source those at the more needy end of society would escape. Now there is talk of increasing/imposing VAT on the 'family basket' of staple goods that everyone most uses - that basket actually includes over 300 items and a lot of them are services as well as food. So for a few million people they will now be taxed at source for the first time and when they go down to the local supermarket they are also going to pay extra for basic goods, I must have missed something here but if the 3% increase in VAT in January 2017 hit consumption surely this will have at least the same impact, confidence which has been rising fast (last month there was a slight decrease MoM which we need to monitor) is surely going to take a blow - or several. There was also chatter from the CDP Alvaro Uribe leader of a one-off large increase in the minimum wage, whilst I am sure housemaids across the country will be delighted along with millions more one suspects it would cost many people their job - even the Unions have disagreed with the proposal. Everyone wants a fairer wage for the working man, yes those that actually work as opposed to typing, however it needs to be much better thought out. Sticking with populist proposals the Government are again set to put their hand in the pocket and subsidize the 540,000 coffee families in the countryside to the tune of USD35mn, again no-one needs to see families suffering however the solution needs to be far more 360 degrees in nature - they need educating in the ways of saving money when the markets are good ready for the rainy day. I have already somewhat denounced the polling agency who ran an approval poll just a week after President Duque started due to the limited sample but regardless they were back last week and that number had already dropped from 53-41%, events in Cartagena are unlikely to help. OIL Where President Duque will need some help is from the oil sector as he embarks on what could be a testing four years in office and thus far the news has been at least neutral if not positive although of course the aforementioned summer holiday is nearly over and the driving that goes in tandem with that. Production however as simply put stagnated - for July the number was a shade over 860k bpd which whilst 0.5% higher YoY and above the medium terms target still represents two months of decreases albeit small in stature. But lets not kid ourselves we are light years away from the 'megas' announced a decade ago when Ecopetrol alone was set to produce 1 million barrels - oil may not be the future as a fuel but it is still the base material for a host of other products which will still see demand for decades longer. Hopefully we can get back to a point where E&P is back to its robust self and production takes off once more but currently Canacol look to have made the wisest move over the past decade by morphing themselves into a world class gas company. FEDESAROLLO Ahead of the Central Bank meeting we had the latest survey of market players and there is optimism on two fronts :

Firstly whilst the expectations for Q3 growth is unchanged at 2.7% we have seen a 0.1% increase to 2.7% for the full year, regular readers will know my views on any numbers lower than 2.7% although given the current uncertainty in some sectors I now find myself hedging against my view that 2.7% may be too conservative.

Secondly the view from 6 months ago, perhaps a little more, that the Government's YE18 inflation estimate of 3% was somewhat fantastical has certainly altered with the average analyst at 3.10%, I can still remember it close to 3.40%. Who knows what effect a benign August CPI reading would have.

BANKING

The Financial Sector reported a mixed first half - that certainly won't surprise anyone - the overall portfolio of products stands at COP442.9bn which is up 5.06% in nominal terms but just 1.8% in real terms - those numbers are actually marginally lower than the growth rates recorded a month earlier in May. NPLs have stabilized at 4.95% (May 4.94%) and the growth rate of 22.6% has now been falling for five consecutive months which is most welcome news. Finally the ROE for the sector rose 88bps YoY to 11.57% and again is welcome news - we may never be Chile but the efficiency battle appears to be going slowly in the right direction.

CONSTRUCTION If there is one sector that is fully into wait and see mode it is the construction sector and the latest raft of data doesn't give much indication as to when we will see a pick up. Licence approvals were down once again (6.4%) and Cement Production continues to struggle somewhat with a 2.2% decline and dispatches down 4.1%. RMC also is struggling with a 2.4% decrease YoY in June and a YTD reading of -7.7%. Where there was some better news was in terms of pricing where cement prices have moved upwards as the problematic imports onto the northern coast have slowed - sticking with pricing there was some cheer in the new housing market where was a 2.27% increase in prices QoQ for the second semester.

That is about it for today - no comment on the markets or Q2 results because in neither case are they setting the world alight. Overall there is a feeling of 'wait and see' in terms of the new administration and to see what positive changes he can bring.