WHITHER COLOMBIA? STAGNATING CONSUMPTION – GOVERNMENT TAX REVENUES TO SHRINK

·        Real consumption (ex-transport and energy) fell 3.06% Y-o-Y in September.  Extrapolating from statistics provided by Colombia’s Departamento Administrativo Nacional de Estadística (DANE) point to a continued fall in consumption in October and November.  The key period will be December which is the lead up to the Christmas and New Year holidays.

·        Colombia’s consumer inflation rate for November continues to fall with Y-o-Y change being 2.41% well below the official targeted range of

·        Producer Price Y-o-Y inflation fell  3.87% in November versus a more dramatic October decline of -4.08%

·        National unemployment (October 2009 – DANE) is measured at 11.5% which was a slight improvement over the three month average (August to October) of 11.8%.  Under-employment remains a serious social issue as individuals claiming to desire a change because of fewer hours, indeterminate schedules, part time work rose to 11.3% from 9.4% in October 2008.  Worse yet, individuals claiming that they had not found suitable full time work because of lack of opportunity rose to 32.2 from 27.1% in October 2008.

·        2^nd quarter 2009 Real GDP continued to perform poorly falling a further 0.51% on top of a 1^st quarter decline of 0.45.

·        Consumption taxes (IVA) fell during the first six months by 3.9% to COP$ 8,576MM from a comparable period of COP$ 8,922MM in 2008.  As a percentage of GNP consumption taxes has fallen from 1.9% (2008) to 1.7% (2009).

The turnaround of the Colombian economy will be impeded if personal consumption is not able to generate a recovery.  Real consumption (ex-transport and energy) has declined 3.06% y-o-y in September.  Real Consumption accounts for approximately 65% of GNP (constant 2000 pesos; source DANE)

Total vehicle sales for the Third Quarter of 2009 declined significantly from the same period last year.  Nationally produced vehicles sales were down 25.7%.. Imported vehicles were down 22.7%.  The two worst performing categories were domestic cargo transport and domestic recreational camping vehicles down 54% and 87% respectively from a year earlier.

                                Source:  DANE; ENEI

In tandem with the decrease in consumption, both real producer and consumer prices have fallen.

 

                                           Source:  DANE

The 2009 inflation rate has fallen from 7.178% in January to 2.72% in October.  Extrapolating from this data, the trend will likely continue for the balance of the year. 

                            Source:  DANE; ENEI

 Examining the repercussions, the Colombian government needs to provide an impetus to domestic demand.  Fiscal spending has certainly increased, exacerbating the national government’s fiscal deficit which added COP$4.2Bn  The process of re-flating the economy through fiscal stimulus may take longer than anticipated.  The movement of money that translates into increased consumer expenditure is distorted by the seasonally consumption.  Colombia’s consumers spend most in December, corresponding to the Christmas holidays. Historically consumption drops off in January and February before recovering.

Would fiscal stimulus spending and actually grow GDP, setting Colombia on the path to recovery? One can argue that a fiscal stimulus masks the weakness of an economy by distorting the allocation of money to preferred government recipients.  In Colombia’s case it will be too early to draw any concrete conclusion until after January 2010 when the effect of .the seasonal increase in consumption has passed.

Extend and Pretend - US Regional Bank Day of Reckoning

The Wall Street Journal published an article on December 8th entitled "What Zions Consider a Loss". the article was placed on the back page of the "Money & Investing" section. The point of the article by Peter Eavis is that Zions capital structure and therefore its Tier 1 capital adequacy ratio is benefiting from a lax accounting and regulatory environment. Management, likely to be the CFO and bank's Treasurer, have marked difficult to price, impaired securities at prices management considers fair. This procedure has been called "marked to model". Among the trading community we have christened it "mark to myth". What is important to shareholders and to the "brokered money community" (large deposits of money placed at the bank through brokers)is that Zions and other banks like it do not have a sudden earnings hiccup. Under present accounting regulations, Zions management is able to delay any immediate recognition of losses. Thus there is no impact on the earnings statement for the moment. Management is able to claim that any dramatic drop in market prices is overdone. Asset price recovery will occur at some future date. There is an imposed time limit of several quarters before biting the bullet.

On January 1st 2010, the new FASB regulations #166 and 167 will hopefully address the “mark to myth” presently used. Under the #166 and #167 banks will have to mark their impaired securities to “fair value”.

I am skeptical. One has only to go to the FDIC website and look up the Uniform Bank Performance Report (http://www.ffiec.gov/UBPR.htm) to ascertain the wave of potential pain that resides in our banking system. I would specifically draw attention to the Peer Group Data Reports. “Off Balance Sheet Items and Derivatives Analysis” are listed for each bank as are “Non accrual and Restructured Loans”. Many of the “Off Balance Sheet Items” are the CDOs, CLOs and other Asset Backed Securities referred to in the article.

There is a tremendous amount of restructuring work to be done. The potential for another financial credit bust has not dissipated.

Peru's Economy 4th Quarter 2009

Peru: Can Private Sector Growth Be Achieved Without Relying on Fiscal Stimulus and Monetary Easing? – Taking the Fat Out
Pros:
• Stable, flexible monetary policy
Cons:
• Over reliance on fiscal stimuli and near zero real interest rates
• External Trade strongly dependent on world mineral demand
• Bank lending outside of larger corporate credits has not manifested itself
• Electric power generation is flat
• Stagnating manufacturing sector
• Delays in government sponsored infrastructure investment hampering growth prospects
Peru’s economy is showing signs of a tepid, uneven recovery. Economic activity (January – September) is being lead by a combination of government stimulus expenditures and monetary easing. Government related expenditures are up 16.8% in the 3rd Quarter (y-o-y) followed by Financial Sector gains of 10.89%, according to recent INEI data (October 2009). The Central Bank has cut reference interest rates from 6.5% at the beginning of the year to the present level of 1.25%, a 525 basis points change. The Board of the Central Bank has held the current reference rate since its August 6th meeting. Bank Reserve Requirements have been loosened Annualized inflation has declined sharply from 6.53% (January 2009) to 0.71% (October 2009). The current inflation rate is well below the 2% target (1% flex either side) set by the Central Bank in March (Inflation Report 2009). Despite these observations Peru’s annualized 3rd Quarter GDP fell a further 0.4 compared to 3rd Quarter 2008. The 3rd Quarter 2009 follows a lackluster 2nd Quarter annualized fall of 1.1%. The Central Bank (Weekly Report #47 – November 27 209) reported that 3rd Quarter domestic demand fell an annualized 4.8% following a 2nd Quarter fall of 5.1%. Public consumption continued to be the strongest 3rd Quarter category performer, rising to 9.8% following a similar 2nd Quarter annualized performance of 7.8%. Public consumption’s contribution to GDP is weighted (2008) only 3.8%. Private sector consumption continued to be a pale ghost of its former self rising only an annualized 1.5% during the 3rd Quarter. In 2008 private consumption along with export trade were the two engines of Peru’s growth, respectively growing 5.9% and 1.6%.

Looking beyond the horizon and into the first two quarters of 2010, Peru’s economy presents a mixed bag. Peru’s next general elections are scheduled for April 2011. The anticipated political jockeying may restrict the effectiveness of fiscal policy measures as political parties dilute targeted expenditures. Looking at the current high rate of government participation in the economy, one can likely extrapolate.
Proinversion Peru, the government’s infrastructure and investment promotion agency, is tasked with overseeing privatizations and concession awards for transportation, ports, airports, communications, sanitation, and eight to ten other public-private categories (www.provinversion.gob.pe). In 2009, over forty projects have been identified for a public-private partnership. As of October 1, fifteen projects have been awarded with definitive investment contributions from the government and the private sector. The largest among these ($650MM) has been a concession to provide hydro-electric power plants and distribute electricity at fixed tariffs.
The construction, generation and delivery of electricity are critical to Peru’s private sector development. The latest report (October 2009) from the Department of Energy and Mines (Estadistica_Octubre-2009_Actualizando- Peru.pdf) indicate that production levels of 2783 Gwh just barely cleared the required 2307Gwh sold to the private sector. Highest daily demand figure was 4088 Mwh which is virtually unchanged from the previous year October 2008 ( 0.01%). Strikingly, the Peruvian economy including its manufacturing sector was in a better condition than current figures (down 9.07% y-o-y)

Peru’s exports are concentrated in its mineral sector. Fortunately world prices for gold, silver, copper, zinc and lead have been rising. What is not widely watched is that the value and volume of non-commodity related exports have dropped. According to ENAPU , export related container traffic measured in TEUs (Twenty-foot Equivalent Units) is down nearly 16% out of Peru’s principal port of Callao. In addition, import related traffic is down nearly 13% using the same measurement.
Since the beginning of 2009, Peru’s equity market (Lima General Index, heavily weighted in favor of metals and mining firms) has risen 104.6%; EMBIG risk factor has narrowed from 215 basis points to 183 basis points (November 27th) and lastly the sol has appreciated to PEN 2.88 ( PEN 3.13 at the beginning of the year). One can only conclude that the market and Peru’s macro-economics have reached a stage of disconnect.



John T. Sullivan

December 6, 2009