Sunrise Over El Dorado : Alianza : December 20th 2018

DAILY THOUGHT : If you are a fan of Law & Order or CSI then Colombia is likely to be a place to tune into over the coming weeks and months as the deaths of Jorge Pizano and his son Alejandro are investigated - the latest development is that despite the evidence that Alejandro died from drinking cyanide in a glass of water a court in Funza has declared that the glass itself is inadmissible as evidence due to the time it took to process and the Fiscal cannot use it in their investigation, meantime Medicina Legal say that the DNA of Alejandro was on both the glass and the bags it came in. This is set to run & run & run........

MARKETS

Total volume was better than the last couple of sessions at USD30mn with ECOPETROL (USD 5mn), GRUPOSURA (USD 5mn) & PFBCOLOM (USD 4mn) all faring well as the COLCAP dropped 0.28% closing at 1322.35pts. In terms of performance moving upwards were CLH (+3.12%) , ISA (+2.77%) and EEB (+2.59%) whilst falling were PFDAVVNDA (-4.85%) ,CORFICOLF (-3.91%) and BOGOTA (-3.51%). The Peso continued its decline this time hurt by the anticipation of higher US rates, all this despite a better print on the oil market. The final close was 3218 which was +0.82% close to the 3221 high on a day of modest volume - USD836mn.

An interesting day on the bond market with sizeable declines along the curve - in contrast to the currency market there appears to have been a belief that US rates would not rise. The benchmark 2024 fell 4.5bps to 6.16% whilst at the long end the 2032 fell 6.1bps to 7.20%, perhaps Thursday will see corrections.

After several week of observing the proceedings in Bogota we finally have a tax bill approved by both the Senate and Congress, it just remains for President Duque to sign it into law next month when it becomes effective.

When all is said and done it may raise COP7bn extra but it has been a PR disaster for all those involved and demonstrated an alarming lack of collective will when it comes to legislation that Colombia badly needs. The headline changes, excluding efficiency's at the tax office itself are as follows :

• Withholding tax on TES Bond traded by foreigners lowered from 14-5%. (would have bet against this at the outset but removal of VAT on family basket made it more acceptable).

• Locals to pay dividends of 15% on profits above USD3,000 (not a huge sum but won't help market sentiment).

• Real Estate Transaction to be taxed 2% if above USD290k (watch for a mass of transactions at USD289.99k).

• Wealth tax on assets above COP5bn (USD1,5mn) (again !)

• Top rate of tax lifted to 39% on individuals (where is the widening of the tax base as promised months ago ?)

• Temporary surcharge on financial institutions which means they will not benefit from corporate tax cuts over next three years (the phrase temporary brings fear to many and FinMin Carrasquilla opposed it).

If you wish to see the full list of 100+ adjustments please feel free to ask, they include a long overdue sugar tax amongst them but simply by looking at the diversity of those items to be taxed we can see that it is hotch-potch of a reform - at some point the Colombian government needs to sit down with a team of experts (foreign and domestic) and plot out the next 20 years and carry out a total re-structure of what is a laborious and unwieldy tax code.

Investors have often asked why Colombian banks are so comparatively inefficient, it has always been the way and appears not be improving with time - here is a brief tale of why, in my case at the largest bank in Colombia but this could any which bank on any given day, efficency in Colombia is going nowhere quickly. The dreaded words "You need to pay this at a branch" fell upon me and I shuffled down the road as ordered with bill in hand - after being greeted by a greeter with his I-Pad I took my ticket and sat down to await my teller, within 1 minute I was reproached for using my cellphone, ironically chatting with my bank advisor, that can only be done once you are stood with the teller - inefficiency number one if you are going to be there 20 minutes but at least it gave me time to look around. This branch had around 20 people waiting and scarily at least 50% were not over 40, there were 23 different positions between tellers and advisors to attend the public, not all attended at that moment but at least 15 staff sat behind desks. Even with this battery of options the attendance is slow - logically the person who can't sort themselves out on line is likely going to need a few extra minutes. On top of the general public are the messengers, the play thing of the wealthy, who diligently sit there waiting to do their master's serving. Colombia is not alone and whilst apples/apples is hard to compare globally according to The World Bank the level of branches/100,000 persons has grown from 9.5 in 2004 to 12.5 in 2017 - compare that to Colombia where the number is 15.5. No-one is expecting Finland Utopiah (1.4) but peer group members such as Mexico (14.4) & Peru (7.7) should be at least in the minds-eye. This is no more than an anecdote but in reality until the local banks can change this dynamic and drive people away from physical banking those efficiency ratios and indirectly ROE's will struggle to improve. This is a change that longer term will come organically as generations change and millennials eventually refuse to leave the house completely but in the short term work

needs to be done.