Sunrise Over El Dorado : Alianza : January 10th 2019

DAILY THOUGHT : A sad day for Venezuelans as Nicolas Maduro takes office for another 6 years demonstrating once again the power of an apprenticeship as a bus driver. The country is broken, the people are fleeing and the opposition are so divided that they simply can't come up with a solution. All logic dictates that the populous will take little more but we live in illogical times when you consider the people holding office around the world. It is blamed on communism but Maduro is no communist, he is a pure and simple dictator - Colombia is taking the brunt of the burden and hopefully before too long will be the main benefactor of Maduro's demise but for the time being the suffering will continue.

The COLCAP continues to rise and yesterday was up 0.68% to 1377.61pts, this despite a closing auction that pushed the index down by 0.31%, volume on the day was a healthy USD63mn with activity dominated by the arbitrage names ECOPETROL (USD 18mn), PFBCOLOM (USD 9mn) and PFAVAL (USD 7mn) The Peso again an out-performer as it put on a further 0.48% to close at 3136 on volume of over USD1bn which is always as healthy sign. As mentioned yesterday whilst we think deeper into 2019 the currency will weaken considerably we are fast approaching the 3115 resistance level which if broken could lead to another leg downwards. *The authorities over the past two sessions exercised the USD400mn in Put Options they took out on December 28th as they continue to accumulate foreign reserves.*

Bonds were firm again although without the dramatic moves seen on Tuesday when they played catch up to events in the US. The 2024 benchmark was down 2.2bps to 6.085% whilst the 2032 dropped 2.5bps to 7.086%. * Yesterday saw the debut of the October 2034 bond, one of several new maturities that will see the light of day, this one will eventually replace the 2032 as the benchmark at the longest end of the curve*

Everyone is feeling the positive effect of the relief rally driven by the modest recovery in oil prices since the turn of the year, it has helped push the local equity market, has pushed the Peso back down towards 3100 and added a sprinkle of confidence to the TES bond market, all is suddenly well with the world or at least on the road to recovery. If only it was that simple however in Colombia's case it is simply the continuation of an unhealthy reliance on one product, one that represented almost 60% of total exports (FOB) in November, this despite years of work by the Government to reduce this dependence by diversifying the economic base. There have been some green shoots when it comes to diversifying however they operate in the shadows of the extraction industry and like any plant in the shadows it is hard to grow. At the beginning of a decade that is fast coming to an end there were Dicken's size Expectations, Ecopetrol alone would be producing 1 million barrels per day and once the other players such as Rubiales were added in Colombia would be a major oil exporter, this juxtaposed against the destruction of Venezuelan oil infrastructure seemed a perfect storm for expansion. But it never happened and now never will - the world is changing, the big fields have already been found and whilst there are still millions to be made at the well-head by many companies the reality is that as an agent for economic development the sector's time has been and gone. At this point it is all about extending the lifeline of the oil industry, trying to extract as much as possible from the fields already in play - Fracking is in the headlines locally but that is long term and judging by how other extractive industries have struggled in terms of environmental licences it could yet be a dead end - just ask the people in the oil sector. The Government of course have to push out as far as possible the useful economic life of the fields and explore the country fully but this has to be done in parallel with a continued aggressive support of other sectors which will not only help fill the revenue gap but which in many cases such as agriculture employ far more people. It is a conundrum but there is little to fear - any weakness in oil prices and the psychological damage to the Peso is in fact marginally beneficial to the country as it pushes other exports, Colombia has plenty of other products that can thrive under a weak Peso scenario.

In the latest update on El Niño where the authorities are suggesting the event may run until March the Environment Minister says that 51.1% of the country's municipalities are facing water shortages and forest fires. The situation is particularly problematic along the Caribbean coastline where 71% of the region is affected - three years ago this was also an area that was very badly hit, the Minister stated that in some regions 90% of rivers are already at low levels. Ironically whilst there are forest fire alerts in some regions in other areas there are heavy rains and the related concerns over landslides. Economists will clearly be looking out for the knock-on effects when it comes to energy and food prices whilst the current expectation is that the phenomena will be far less damaging than the last time around.