Andean Region Fixed Income Weekly June 1 st 2017

Andean Region Fixed Income Weekly June 1 st 2017 What s inside Colombia... P.2 Market View.... P.2 Colombia s Topic of the Week... P.3 Indicative Prices... P.3 Peru... P.4 Market View.... P.4 Peru s Topic of the Week... P.5 Indicative Prices... P.5 Ideas Tracking Record:... P.6 COLOMBIA Market view COLOMBIA s curve in USD has been steepening in the last months: with a difference of 316 bp between COLOM 2019 and COLOM 2045, it presents the highest figure among LatAm countries. Our most appealing trade idea in Colombian USD corporates: Sell Ecopetrol 2023 Buy Pemex 2023. While ECOPET/23 is near its lowest yield since 2015, Pemex/23 is close to its average yield since 2015. Topic of the week: Colombia Central Bank weighting between poor economic growth and pressures on Consumer Prices. Colombia Central Bank (BanRep) hold its monetary policy meeting and the decision was to cut its repo rates by 25 bps from 6.50% to 6.25%. Our forecast for next meeting is 50bps cut (rates at 5.75%), based on high real rates and poor economic growth. PERU Market View Finance Minister Alfredo Thorne said that the government intends to accelerate the implementation plans with Euroclear. The Minister did not specify which bonds will be Euroclearble, whether the outstanding bonds or only new issues. We do think that this should be extended to all sovereign bonds. Local bonds traded on the strong side supported by the news on Euroclear. Topic of the week May inflation come lower than expected at -0.42%MoM to reach 3.04%YoY. This provides room for the CB to cut rates to boost growth if they consider necessary. 1

Colombia COLOMBIA Market View Since OPEC s ordinary meeting last week, WTI (a key driver to LatAm currencies) has suffered an important volatility that affected COP. However, a COP depreciation observed between Friday (last week) and Wednesday was erased on Thursday in a movement that broke both MA100d and MA50d. Technical evidence suggests that COP would strengthen against US dollar in the next week and our short-term target ($2868) is indeed below current levels. A scenario in which US Dollar would weaken further against major currencies would mean that it would present a similar behavior against LatAm currencies in coming weeks. According to our AdCap Fx Forecaster, if WTI sets at $49 (with a DX between 96-97) USDCOP s structural level would surround $2887-$2904. More information please, send us a request. After Central Bank cut rates 25pbs last week, locals are rethinking their mid-term repo rate target. Market is reaching a consensus that given current economic conditions would boost a Central Bank more aggressive expansionary bias; therefore short-end benchmark (COLTES 2018) has been trading this week at 5.20%, 12bps below what was observed week before, pricing an aggressive BRep policy. In addition, we consider that market is considering that Central Bank would cut 50bps its rates in June, a scenario that we introduced at the beginning of this week. Finally, long-end benchmark (COLTES 2024) reached 5.85%, the lowest yield since June 2014: we believe that there is still room for appreciation because we consider that 5.60% would be easily reachable in coming weeks, given our CPI and BRep perspectives. Our most appealing trade idea in Colombian USD corporates: Sell Ecopetrol 2023 Buy Pemex 2023. While ECOPET/23 is near its lowest yield since 2015, Pemex/23 is close to its average yield since 2015.In addition, the proposed trade would improve a portfolio risk profile: PEMEX has a BBB+ rating (S&P), above ECOPETROL that is rated at BBB (S&P). Finally, in terms of investment return, Ecopetrol/23 would provide a 1Y return of 4.20%, below Pemex/23 s 1Y return of 4.96%. More information please, send us a request. Colombian risk perception has performed well in 2017: after an initial noise and volatility after President Trump election last year, 10Y COL CDS has presented the major reduction among Latin American countries (-33.0%), while those of Mexico, Peru, Chile and Brazil have dropped 25% on average. According to CDS performance in 2017, the country becomes as one of the most appealing bond issuers in the region, partially isolated from Brazilian political turmoil and Mexican noise coming from Trump s policies. COLOMBIA s curve in USD has been steepening in the last couple of months: with a difference of 316 bp between CO- LOM 2019 and COLOM 2045, it presents the highest figure among LatAm countries (PER 289 bp, MEX 244 bp, PAN 279 bp and BRA 388 bp); therefore, we recommended some weeks ago, to sell COLOM 2019 and COLOM 2020 or buy COLOM 2026 and COLOM 2027. Short-end appreciation seems limited when bonds are compared both to historical data and US Treasuries. If short-end bonds are replaced by Colom 2026 and Colom 2027, 1Y return could raise at least 150-350 bps. More information please, send us a request Colombia's central bank lowered the benchmark interest rate by 25 basis points to 6.25%, following market expectations. Concerns about a weak economic growth and a CPI downward trend are the main reasons that explain BRep decision. Voting was tight: 4 VS 3, favoring ¼ VS ½ cut. We expect 50pbs cut in June s meeting. Central Bank s Board of Directors members active during last week: JA. Ocampo worried about poor internal demand and decreasing economic growth in 2017. He supports a monetary policy biased towards favoring growth over prices control. We consider that he is one of the more dovish members in the board. JJ. Echavarria, (probably the most hawkish member), determined that despite growth-related news are not good and consumer confidence is still very low, there are some concerns regarding prices and probably BRep rate target will not reach 4% in 2017 2

Colombia Colombia s Topic of the Week. Colombia Central Bank weighting between poor economic growth and pressures on Consumer Prices. Last Friday, Colombia Central Bank (BanRep) had its monetary policy meeting and, as expected, the decision was to cut its repo rates by 25 bps from 6.50% to 6.25%. In the last two months, the Board members have showed a way more dovish bias, resulting in unanimous decisions on cutting rates but differing only on how the pace of cuts must be done. Our view on inflation and real rates, along with the new balance of the Board with its new co-director J.A. Ocampo, let us think that the Bank will continue with rate cuts in the following months, until reaching 5.25% in 2017. Main points to consider are listed below: New balance of the board: JA Ocampo. After two meetings with a participation of only 6 out of 7 members on the Board, Co-director Ocampo was finally appointed by president JM Santos. He gave an additional dovish bias to the board, since in his last appearances on media show a clear bias to support economic growth (over price controls) and to be in line with Government s needs and objectives. Deeper risks in economic activity. Growth rate for 1Q was released at 1.1%, lower than BanRep forecasts of 1.3% and confirming poor results in economic activity indices. Consumer confidence printed its lowest historical and the Bank still sees risks on a contraction on the internal demand. Other worrying results rely on Industrial Confidence (-8.5% ) and Economic Activity Index (-0.9% y/y). Doubts on CPI convergence to its target. Inflation is the fact that made the Board to take a non-aggressive decision on cutting rates. Main doubts are set on behavior of non-food CPI which have put pressures on consumer prices and therefore leads to a risk on inflation convergence to its 4% target. Our forecast is total CPI at 4.57% for Dec/17. Contractive real repo rates. Despite total CPI is in a high level (4.66%) and that BanRep has cut repo rates by 150 bps in the last 6 months, ex-ante real rates are still high and considered contractive; so it is not currently promoting economic growth. Historically, real rates have been considered expansive when they reach a level below 150 bps. To conclude, following the ideas described above, our forecast for next meeting is a cut of 50 bps (rates at 5.75%). There are two main facts that let us think that the Bank will adopt a more aggressive monetary policy in its June meeting: 1). High real rates, combined with several co-directors focusing on economic activity figures and economic growth: a 25 bps will be still not enough to lead interest rates to an expansive policy. 2). Repo rates at 6.25% are historically high considering economic growth figures that have been released in the last year; we think that, balancing CPI and growth risks, the Bank will end 2017 with repo rates at 5.25%. Indicative Prices 3

Peru PERU Market View Finance Minister Alfredo Thorne said at an event organized by Bloomberg LP the government intends to accelerate the implementation plans with Euroclear. The Minister did not specify which bonds will be Euroclearble, whether the outstanding bonds or only new issues. We do think that this should be extended to all sovereign bonds. Euroclear will provide a channel to access Peru s capital market, which boosts liquidity and lowers associated costs. Peruvian Sol depreciated 0.82% during May and closed the month at 3.2705, and appreciated 2.90%YTD. The risk factors for the FX are a deterioration of the global scenario, including: (1) the political crisis in Brazil and United States, (2) higher volatility on commodities make investors seek refuge in the dollar. Additionally, Central Bank interventions that support FX above 3.24 made that investors hedge their positions on local bonds. We expect the Sol to trade in the target of 3.24-3.30- The market consensus expects the CB to intervene when the currency PEN trades near the lower bound of the range. Local bonds traded on the strong side after Minister of Finance Thorne confirmed the government will accelerate the process to make the local bonds Euroclearble. The bonds tightened 5bps on average, highlighting Pen27 with a 9bps drop while Pen 55 drop 1bp during yesterday and today. The Pen 20, Pen 26 and Pen 23 shows the best performance in the year with -101bps, -89bps and -85bps of yield tightening YTD, respectively. The dollar bond remains almost flat across the curve. The best performer continued to be the Peru 27 which yield drop 62 bps YTD and currently looks expensive in the yield curve. Meanwhile, the Peru 37 yield did it in 41 bps YTD. During the week, dollar bonds has lower activity than local bonds, as international investors remains on the sideline. Inflation-Indexed Bonds (VACs) showed mixed performance during the week. VAC yield curve drop 5 bps across the curve, except VAC 24 and VAC 18 that rose 8 and 1 bps, respectively. On YTD basis, VAC 54 drop 32 bps reaching to 3.56% YTM, on the other hand VAC 46 rise 19 bps. 4

Peru Peru s Topic of the Week Inflation come lower than expected. May CPI posted -0.42%MoM and 3.04%YoY. Food and housing prices that continue to reverse after the sharp increase for El Niño registering a fall of -0.83%MoM and -1.21%MoM, respectively. The inflation continue above the Central Bank target of 2% (+/- 1.0%). In our view, Inflation data provides room for the Central Bank to cut the reference rate at the next Monetary Policy Meeting on June 8 th. President Central Bank, Julio Velarde, said in an event that the CB is considering further rate cuts, but did not specify the timing. We expect another 25bps rate cut in the year. Leading economic indicators like Construction and Utilities (-3.81% and -0.74% on March, respectively) should rebound in April as activity slowly recovers from disruptions caused by heavy rain and flooding in March. Increasing public- and private-sector spending as part of the reconstruction plans already announced should support growth in coming months. Minister of Finance Thorne said at an event in New York that the flooding underscored problems with Peru s infrastructure but the credit will emerge stronger from the current challenges. Furthermore, Peru will use up to the 50% of the USD 8.0bn reconstruction plan known as FEF Fund of Fiscal Stabilization. Furthermore, the government will use loans from BID, CAF and World Bank equivalent to 1.4% of GDP to finance the reconstruction after the floods. Hence, they do not intend to issue bonds to finance the rebuilding and will be opportunistic when it comes to future liability management transactions. He reiterates Peru will grow 3.0% this year. Central Bank President Velarde, who was also at the event, mentioned that the CB plans another rate cut but does not have a specific date. Indicative Prices 5

IDEAS TRACKING RECORD Opening Date Trade Entry Avg. Spread/ Target Current Level 28-Mar-17 BUY COLOM '33 HOLD FOR 360 DAYS 5.40% - 5.51% 21-Mar-17 BUY TES UVR '19 HOLD FOR 180 DAYS 2.59% - 2.14% Closed at 14-Mar-17 OW COLOM 45 Vs UW COLOM 20 270 240 265 5 28-Feb-17 OW COLOM 24 Vs UW DAVIVI 22 89 151 97 8 14-Feb-17 OW COLOM JUL '21 Vs UW DAVIVI '22 157 212 170 13 7-Feb-17 OW BANBOG '26 Vs UW BANBOG '23 100 74 93 7 31-Jan-17 OW COLOM '45 Vs UW ECOPET '43-192.0-230 -181-11 24-Jan-17 OW COLOM '24 Vs UW COLOM '41 155 167 162 7 13-Dec-16 OW COLOM Global TES '27 Vs UW COLTES '26-27 15 24 51 13-Dec-16 OW BCP '20 Vs UW BCOCPE '20 14-21 -4 18 6-Dec-16 OW BINTPE '29 Vs UW COFIDE '29 96 86 89 7 6-Dec-16 OW DAVIVI '22 Vs UW DAVIVI '18 282 246 253 29 29-Nov-16 OW KALLPA '26 Vs UW LIMAMT '34-46 -91-80 34 29-Nov-16 OW PERU '33 Vs UW PERU '50-10 -20-17 7 22-Nov-16 OW BANBOG '23 Vs UW AVAL '22-10 15 11.06 21 15-Nov-16 OW BCP '23 Vs UW BCOCPE '20 67.0 37 79-12 8-Nov-16 OW BCOCPE '18 Vs UW MIVIVI '19-2 30 56 58 1-Nov-16 BUY BANBOG '26 5.8 5 6 20 25-Oct-16 OW COLOM' 45 Va UW COLOM' 24 123 112 127 25-Oct-16 OW PERU GB' 55 Vs UW PERU GB '37 46 25 31 15 18-Oct-16 OW COLOM '24 Vs UW COLOM '20 95 81 102-7 11-Oct-16 OW BNSCN '27 Vs UW BINTPE '29 81 120 101 20 4-Oct-16 OW BCOCPE '22 Vs UW COFIDE '22 28 0 26-2 27-Sep-16 OW BINTPE '20 Vs UW MIVIVI '23 12 55 49 37 20-Sep-16 OW BCP '20 Vs UW COFIDE '22 31 65 52 21 20-Sep-16 OW SCCO '40 Vs UW SCCO '35 13-5 17-4 13-Sep-16 OW BANBOG '23 Vs UW DAVIVI '22-47 -7-16 31 6-Sep-16 OW BINTPE '20 Vs UW MIVIVI '19 101 64 89 12 30-Aug-16 OW BANBOG '23 Vs UW DAVIVI '22-21 3-33 -12 30-Aug-16 OW GRUPOS '21 Vs UW COLOM '21 137 94 101 36 23-Aug-16 OW BCP '20 Vs UW PERU '25-24 24-9 15 16-Aug-16 OW CALLAO '23 Vs UW LIMAMT '34 73 120 116 43 16-Aug-16 UW DAVIVI '22 Vs OW GRUPOS '21 95 118 122 27 9-Aug-16 OW MILPO '23 Vs UW HOCLN '21 91 150 100 9 2-Aug-16 OW BCOCPE '18 Vs UW BCOCPE '22 74 160 137 63 26-Jul-16 OW MINSUR '24 Vs UW VOLCAN '22 75 301 34-41 19-Jul-16 OW ECOPET '43 Vs UW ECOPET '23 174 144 193-19 19-Jul-16 OW ABENGO '43 Vs UW PERU '33 250 215 235 15 12-Jul-16 OW TGPERU '28 Vs UW PERU '27 127 93 130-3 5-Jul-16 OW Grupos '21 Vs UW Davivi '22 96 125 151.43 55 21-Jun-16 OW BCOCPE '20 Vs UW BCP '20 44 22 55 11 14-Jun-16 OW MILPOC '23 Vs UW HOCLN '21 74 238 157 83 7-Jun-16 OW COFIDE '29 Vs UW COFIDE '22 173 144 140.05 33 7-Jun-16 OW BANBOG '23 Vs UW COLOM '23 189 150 203 14 Diff 6

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