Sunrise Over El Dorado : Alianza : December 18th 2018

DAILY THOUGHT : Once we have completed the novel formally known as 'Tax Reform' the legislature will be moving onto new business and one of the first items will be political reform which was shoe-horned through the Senate late Sunday, it was a tight squeeze but it still has life. Sadly much like the VAT or Income Tax components of the current reform crawling through Congress one of the biggest and most polemic aspects of Colombia politics 'Listas Cerradas' has already been left on the cutting room floor, it is a type of proportional representation that simply put protects the 'superstars' in each party. There is of course plenty more malpractice for the Congress to get stuck into but in the end asking politicians to police themselves is a hazardous business.

MARKETS

If it wasn't for the rest of the global retreat you might call the recent COLCAP decline a major crisis, yesterday we lost a further 1.74% to close at 1335.64pts and arguably the volume (USD23mn) is more of a concern than the overall direction. Amidst this anemic volume the most active were ECOPETROL (USD 5mn), PFBCOLOM (USD 4mn) and GRUPOARGOS (USD 3mn). In terms of performance we saw good days from CONCONCRETO (+3.45%) , PROMIGAS (+1.89%) and CEMARGOS (+1.58%) whilst to the downside the Odebrecht cloud continues to hang over PFAVAL (-5.27%) ,BOGOTA (-4.92%) and GRUPOAVAL (-4.85%). The Peso has a turnaround in the middle of the session to close 0.47% stronger - this move apparently (unless you believe in coincidence) driven by the Goldman Sachs comments with regards to rate hikes and US recessions. The close came at 3180 although volume of USD713mn was light by recent standards.

The bond market continues to strengthen as the US situation turns more favourable, a hardly believable situation a few months ago - the short end of the curve was flat but as we moved further out we saw healthy gains for 2024 (-1.4%) & 2032 (2.4%) which closed at 6.20% & 7.26% respectively.

TAX REFORM

Having added extra sessions this week to get reform passed the Senate didn't get the job finished with 21/65 points still to be voted upon today before a final vote - remarkably the Congress didn't change the order of the day and discussed other matters, they will get to work today. Meantime FITCH's risk director in a press interview whilst stating that he never expected the Government to get the COP19bn or even COP14bn they were seeking also made it clear that under the revised plans things were going to be tight for the authorities, there needs to be cuts to expenditure for 2019 but the agency sees little room for flexibility - in terms of 2020 when revenues begin to drop there will be need to be further adjustment but in both cases they would call the Government to check on their Plan B before taking any action.

CONSUMER CONFIDENCE

A real surprise, shock would perhaps be a better adjective, at the November confidence number - things have been on the soft side ever since the tax reform hit the headlines as consumers tried to calculate the potential impact on disposable income - having peaked at 15.5 we dropped into negative territory over the past two months and the expectation was for a further deterioration to -2% this time around - unquestionably -19.6% was on nobody's radar, the only clue potentially at the disaffection on the streets has been a series of opinion polls that have pointed to a lack of confidence as to the direction of the country.

Looking a little deeper we find that the concerns are broad-based with a deterioration in every area with arguably the stand out being the -48 reading for the 12m economic outlook, down from -13 in October and -32.2 a year ago, it really is a concern especially given that most experts see the economy expanding over that period. "Perception is Reality" This may as yet just be a short-term funk when it comes to confidence and it will be interesting to see the Retail and Industrial data at the end of the week - it may as yet blow over as the tax reform has moved ahead and in large part has left the consumer alone - by December that same perception may have improved. CONSTRUCTION LICENCES According to the Dane in October 2018, 4.2% less square meters were licensed for construction, the total was 1,879,067 m², or 82,755 m² less than in the same month of the previous year (1,961,822 m²). This result was explained by a 10.4% reduction in the approved housing area and the 12.4% increase for non-residential destinations. As a leading indicator this arguably squares with the direction that confidence data has taken recently. Another development in this area is that the Government as part of the spending cuts for has cancelled it mortgage subsidy scheme for homes between USD32,000 & USD106,000 - the sweet spot for the 'middle class'. This has been a huge success and driver for the construction industry and the construction federations are predictably concerned.

CANACOL

The company were on the wires early on Monday as the published their plans for next year - they are looking to invest USD119mn which will be financed via existing cash as well as new revenue flows. In terms of sales they are looking at an average of approximately 179 million cubic feet per day this does though assume June 1 2019 as the completion date of the expansion of the Promigas gas pipeline. In terms of selling price they are looking at a Net USD4.75/Mcf - there will also be crude sales but only whilst Rancho Hermoso is disposed of. It is all pretty bullish with CEO Charle Gamba highlighting 3 areas for 2019. 1. Drilling - 8 exploration and development wells. 2. Completion of Jobo gas processing facility during 1H19 which increase treatment levels by around 65% which will be needed to accommodate the new agreement with Promigas and the increase in sales. 3. A definitive agreement to build a new gas pipeline from Jobo to Medellín or Barranquilla, increasing the Corporation's gas sales in an additional 100 Mcf in 2021 at total sales levels greater than 300 Mcf. Things are moving along nicely for Charle and his team with the final days as an oil supplier almost upon us.