What Jumps Out : Reactivation

The title of this humble note is ‘What Jumps Out’ however this past week most headlines have been so contaminated with politics it has been hard to find much else to discuss. Everyone who ever picked up a banner and marched in Colombia is a descendant of Vladimir Lenin and anyone who ever owned a business has modeled it on the Victorian era factories. There is no room for middle ground – and that is without even getting into the social networks.

So instead let’s look elsewhere.

Colombia’s COVID numbers are still far too high, a new record last Thursday. Fortunately we haven’t had to go the Peruvian route of tripling the official death-count, however at the same time the country is edging up the global table and on a daily basis is within the top ten of new fatalities. Nonetheless, the country is planning to re-open over the next week or so. City mayors are already drawing up their ‘Reactivation plans’ for the economy. This will include colleges and bars, and there will also be less testing for both domestic and international flights.

There is of course some trepidation: the vaccination program is moving ahead slowly but in a structured fashion. Fortunately, Colombia has a very young population when compared with the developed world and therefore the elderly and vulnerable have been inoculated relatively quickly. Before long, the <50’s will be called and hopefully that will mean that death rates will come down quickly.

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One area that has been impacted by COVID and the more recent disturbances is the oil sector, with production being hit just at the moment when global prices are returning to respectable levels.

Whilst the Ministry of Mines reported that at the end of 2020, Colombia still had 6.3 years of reserve life, unchanged from 2019; the fact is that this is the consequence of 2020 production being the lowest since 2010 and also that the reserve figure for 2020 is actually lower than that registered in 2018.

The latest export data for April provides little conclusive evidence given the easy comparison with 2020. There was a rise of 108% FOB to $800 million USD – however there was a decline of 27% in terms of tonnage which fell to 2 million tons. According to Tanker Trackers there has been a pickup in May due to Chinese demand and refineries coming back online, but the market will await the formal data from DANE (Colombian statistics agency) in a few weeks.

Rupert’s opinions & analysis as an independent expert contributor are his own and not necessarily those of Finance Colombia or the BVC.

At a micro level we find logistical problems for all producers, from Ecopetrol down to smaller operators such as Geopark and Frontera, being caused by the recent demonstrations and road blockages. None of this helps the overall situation. On top of the logistical issues, Ecopetrol has also suffered a downgrade from S&P who removed their investment grade rating, however analysts don’t feel it will impact capex in the short-medium term.

Whilst oil is threatening to become the new coal in terms of popularity, it is important for Colombia in the short term to maintain production at optimal levels in order to capitalize on the anticipated forthcoming global economic rebound.

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Another area affected by the recent protest is that of urban employment – the anticipation was that in April there would be a continuation of the downward trend, however that wasn’t to be the case.

Consensus was for a 16.4% reading, down from 16.8% in March – however the final number was 17.4%. That is much lower than the 23.47% in April 2020, however if we dial back further to April 2019 we find 11.14%.

Some of the impact is unquestionably due to the recent upheaval however there has been a more general sluggishness ever since the COVID crisis started to abate. The caveat as ever is that close to 50% of Colombian employment is ‘informal’ and therefore water-tight analysis is very complicated.

The same has been true of Total Unemployment which gauges the whole country. In April 2019 the number was 10.33%, in 2021 it was 15.05%. These numbers also reveal another separate weakness in the system: women continue to suffer disproportionately. A year ago we can see that the overall number was at 14.6% (Male 11.9%, Female 18.4%) – today we find that for men the number remains at 11.9% whilst those for women have risen to 19.9%.

There have been various announcements from both the national and regional administrations with regards to employment programs however the proof will be in the pudding, especially when it comes to women.

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Market flows for the month of May were impacted by the formal re-balance from the COLCAP to the MSCI COLCAP. Volume on that day totaled US$250 million, the highest for some considerable time.

Foreigners were the most active during the month with 43.6% of total volume – after that it was AFPs (17.5%) & Brokerage Firms (17%). In terms of direction, foreigners were the only sizable net sellers (US$75mn) – AFPs took up the slack with US$77mn in net purchases. The other sectors were relatively neutral in terms of buys/sells.

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Finally returning to the current crisis, President Duque insists that Tax Reform II will be one of consensus and Finance Minister Restrepo repeated that it is the highest priority…but observers are already asking why is it taking so long ?

There is frustration at the apparent lack of progress, given the amount of items that have been ruled out of the reform, this should have been a fairly quick process. If the option of repatriating some of the international reserves is to be ignored then there is only a short list of resources that can be used.

There is little hope of the bill even being presented before Congress heads to the beach in a few weeks and Finance Minister Restrepo has already alluded to that. However this needs to be on the table as soon as they return in July. S&P has acted, Moody’s has indicated displeasure, and Fitch is just one notch from moving Colombia to junk – it’s time to finish with the consultancy and submit the bill.

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That is about it for today – remember these are just themes that jump out at me – please refer to your local analyst, economist, salesperson or soothsayer for more details.

My regards to all,

Roops