Sunrise Over El Dorado : Alianza : November 27th 2018

DAILY THOUGHT : So we finally have the details of the tax reform (see below) which will be voted upon , and no doubt diluted, over the next couple of Congressional sessions - in the end they cobbled together COP13.72bn (USD4.28bn) in extra revenues but even up to the final moments they were throwing in new components. From the start this seems to have been poorly planned with too much self interest, the income tax base expansion never even made the first cut, the cornerstone VAT extension is on the cutting room floor and what we are left with is a hotchpotch or as one of my journalist friends perfectly described it "Todo un Frankenstein" - no translation needed.

MARKETS

Volume of USD30mn was about average versus recent sessions as the COLCAP rose 1.67% , closing @ 1393.78pts, the direction of the MOC orders was to the buy-side, a relief given Morgan Stanley's somewhat pessimistic remarks regarding the country. The day's best performers were PFCEMARGOS (+5.96%) , PFDAVVNDA (+3.52%) and PFBCOLOM (+3.29) whilst HCOLSEL (-4.43%) ,ETB (-2.56%) and CELSIA (-1.50%) saw things differently.

Another tough sesssion for the Peso as it hit a 30 month low despite a modest recovery in oil prices - for the time being the two appear to have de-coupled.The currency closed at 3245.95 a decline of 0.53% on the day, volume of USD994mn was average. This was a day when the Latam currencies in general suffered, the Peso was not the worst effected.

The bond market fell a little further yesterday however versus recent gains it represented no more than a breather and volumes were on the light side. The 2024 benchmark rose 1.5bps to 6.39% whilst the longer 2032 closed out the session 1.8bps weaker at 7.436%.

The various stake holders came up with the tax bill which will be debated and voted upon over the next couple of days and there were a couple of curve balls included in order to get us to COP13.74bn (USD4.28bn) - those with good memories will remember that COP19bn was the initial proposal level with COP14bn being the target, how much above COP10bn we finally are is up for debate - literally.

• The main chunk of change will come from a limitation on VAT refunds to 90% of the total expense - this will be account for USD1.8bn. Been around the conversation for sometime so no great surprise and corporation taxes should more than compensate.

• Income tax adjustments USD593mn. This should have been most of the reform, politically too tough to sell.

• Wealth tax adjustments USD375mn.

• Adjustments to DIAN (Tax Agency) USD312mn. Loophole filling ?

• VAT adjustments USD300mn. Was the majority of the reform but now an after thought.

• Dividend extensions USD253mn. On local equity player but also a proposal to tax profits being sent back overseas by international corporations.

• Banks Profit Tax USD218mn.Left field arrival last night - always an easy target politically.

• 2% VAT on Property Transactions above USD343k - USD343mn. VAT on property has been in and out of the debate and is now back in - of course this is a sector that is full of loopholes which if not filled will mean dilution of the actual effect.

As people know I have been a champion of the fight against inequality here in Colombia - the GINI coefficient says it all however as any international agency or the new friends in the OECD will tell you, there comes a time when all of society must contribute more and such an opportunity has been lost. The reform has fallen once again on the corporations and the wealthy - both have the money but the burden should not all be theirs.

ECONOMIC FREEDOM INDEX

On another quiet day there was was time to look at the Economic Freedom index recently published for 2018 to see where Colombia sits on a global & regional level as well as looking at its strengths and weaknesses. In total 180 countries are surveyed (some such as Syria & Yemen for obvious reasons aren't covered) and Colombia sits in a very creditable 42 position with a reading of 68.9% which in terms of the region is only below Chile (75.2%) and marginally ahead of Peru's 68.7%, in fact in terms of the region there has been little change in the order since 2000 although Colombia was previously below Peru - it will come as little surprise that Venezuela (25.2%) sits bottom of the regional ranking.

Looking at some of the different areas we find that Colombia has improved on Property Rights (56.9%) but still lags most of the region however in terms of the most topical theme of Tax Burden (80.3%) it is one area of comparative success whilst Labour Freedom (75.2%) is the best reading in the region (average 56.8%) and well above the global average of 58.9%. Such survey are always interesting to read over and whilst they will not directly affect investment decisions it is comforting to see Colombia faring well, at least comparatively, in many areas.

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