Sunrise Over El Dorado : Alianza : December 14th 2018

DAILY THOUGHT : Whilst 24 hours ago we had progress with the Fiscal's Odebrecht investigation with the announcement of Leonardo Espinosa as Ad-Hoc Fiscal to look into the full facts there was a big development overnight when another court in Bogota imposed a total fine of USD250mn on all of those who were either directly involved in the Ruta del Sol concession or benefited from the project or were involved in the exchange of bribes. Amongst those fined and banned for a decade from participating in such projects are Odebrecht and Episol the subsidiary of Corficol, also amongst those found responsible for what occurred was the ex President of Corficol Jose Elias Melo. The ANI where Luis Andrade the ex head is trying to clear his name was also found culpable for a lack of control.

Episol were on the wires last night immediately denying the allegations and the findings - no doubt this will appealed , we estimate Episol would be responsible for around USD75mn. Odebrecht would pay the bulk of the fine which is considerably more than the USD33mn they offered recently to walk away from the situation. This does not impact the Ad-Hoc Fiscal's own investigation and there is also the small matter of the DoJ in the US. The case continues and likely for some time........

MARKETS

The COLCAP was back to losing ways with a decline of 0.65%, closing @ 1365.35pts. volume of USD30mn look alarmingly holiday-like, the schools are now on holiday and arguably after a very frustrating year investors have decided to hit the farms and beaches as opposed to trying to guess who Donald Trump will pick a fight with next, where oil is going to print tomorrow or perhaps where the next scandal is going to appear locally - it has been anything but a vintage year for Colombia. Perhaps local investors will move some of their assets into equities for the associated tax benefits or the local AFPs will attempt a little window dressing however in both cases they are leaving it very late in the day. The most traded stocks yesterday were ECOPETROL (USD 10mn), PFBCOLO (USD 5mn) and GRUPOSURA (USD 4.5mn) whilst the best performing large cap name was PFDAVVNDA (+3.09%) , not I am sure because I have been recommending it all week but nonetheless on the move.To the downside were Banco de BOGOTA (-5.02%) & CLH (-3.61%) , in both cases little explanation required.

The Peso traded light volume (USD740mn) as it closed at 3179, 0.34% weaker on the day and again inversely correlated to the oil price.

The bond market fared well on Thursday - the 2020 fell 2.7bps to 5.06% whilst at the longer end we saw both the 2024 (6.20%) & 2032 (7.24%) drop by a couple of bps as well.

TAX REFORM

The final version of the tax reform (in reality it is no more than an adjustment) has been delivered and will be voted on next week - reportedly 'discussions' were lengthy and loud however we are pretty much where we were COP7.5bn of extra revenues versus the reported COP14bn required and the COP19bn proposed. In other news which mean slightly less in terms of spending cuts in 2019 it was announced that by the Ministry of Finance announced that the Inter-Parliamentary Public Credit Commission gave its approval for foreign credits for up to USD 350 million (IDB) and external debt trading operations with multilateral banks up to US $ 226 million. It won't fill all of the needs but nonetheless welcome.

The stock continues to be pressured and there appears little respite on the horizon as investors have simply decided to walk away from a situation they either don't understand or simply can't be bothered to do the detective work.

• 90% of the headlines are reserved for Brazil despite the fact there is no direct link between the two companies continued reports of lessors removing their planes, which may simply be taken up by the competition locally, are not helping AVH - perhaps if it was still Ocean Air it would have bene different.

• The forthcoming attempt by AVH to delay or cancel deliveries from Airbus could go either way but as individual airline contracts can vary immensely in terms of price, as well as the terms and conditions then it is impossible to ascertain the impact. Simply put it could range from multi-millions per plane to a situation where Airbus say that 'fine we have another buyer' - the airline market is currently relatively tight and that has to be AVH's best hope.

• Do they even need the planes ? When the 100 planes were ordered it was a sensational statement of intent for an airline that had been to the brink in 2003 but roared back to dominate the local market and open new routes overseas. But now Colombia is saturated with planes amid a much more competitive environment and in terms of overseas expansion if they are going to buddy up with COPA and UNITED then logically in many instances they will use those carriers as opposed to putting on new routes themselves...in short where would they put the planes in order to avoid under-utilization ?

There are few conclusions to be drawn because the information is still in short supply but for the time being market players seem content to wait for the applicable information before stepping in.

SURVEY

The latest opinion poll from Gallup makes for some uncomfortable reading for a Government that should still be in its honeymoon period, but those first blushes of marriage have disappeared, we won't dwell but here are a few highlights :

• President Duque Approval Level 29% (October 47%)

• FinMin Carrasquilla 10%

• Education Minister Angulo 9%

• Nestor Martinez (Fiscal involved in Odebrecht-Corficol-Aval scandal) 20%

In reality that is likely a fair reflection of the pulse of the country at this juncture given the tax reform and student demonstrations and the continued revelations related to Odebrecht.