The Infrastructure Sector’s Long Road to RecoveryHead of Research for Global Infrastructure at S&P Global Ratings
As the coronavirus pandemic continues to disrupt the global economy, the infrastructure asset class is facing a bigger challenge today than during the global financial crisis. Infrastructure assets relating to the movement of goods and people have been highly exposed by the measures to control the spread of infection, with lockdowns having brought most parts of the world close to standstill.
More broadly, economic activity has become stifled due to the outbreak, with the global economy entering a recession. The World Trade Organization has forecast that, in 2020, global trade volumes could fall by between 13% and 32%. S&P Global Ratings has forecasted that, globally, gross domestic product could fall by 2.4% this year.
These factors have contributed to unprecedented rating pressure for infrastructure assets, notably airports. While infrastructure is largely resilient in long-term scenarios (the asset class outperformed non-financial corporates in the crisis environment), it is not immune from the current pandemic’s effects.
Downward pressures on sovereign credit quality of emerging markets in particular has added to rating downside. In Latin America, for instance, S&P Global Ratings has taken negative rating actions on more than 60 Latin American infrastructure entities in its portfolio since the outbreak. In South and Southeast Asia (SSEA), we believe that one in four infrastructure and utility ratings face downgrade pressure.
Airports Facing Unprecedented Loss
Of all infrastructure assets, airports in particular will likely face a prolonged recovery, something that has led us to lower the ratings on 11 airports since March 2020. Airline body IATA estimates a contraction in air passenger traffic of roughly 50% for most regions this year.
Moreover, we assume air traffic still to be down by 25% to 30% in 2021 (compared to 2019 levels), with a full recovery not expected before 2024, as some form of social-distancing measures, international travel restrictions and quarantine measures will likely continue until a vaccine is found. The slow recovery may also coincide with structural changes, such as a likely reduction in business travel and a downsizing of airline fleets.
As the recovery takes shape, corporations and countries need to ramp up preparations for low-probability, high-risk and massively disruptive events in the future.
With airlines under significantly more pressure than airports, it is not surprising to see the bulk of government rescue measures going in their direction. In the United States, for instance, the airline industry has received $25 billion in funding from the Treasury Department, with other governments expected to follow suit. The extent of disruption has seen this funding consumed at an alarming rate (to process refunds for cancelled flights and to service large cost bases). Yet the cash burn is expected to slow once lockdowns begin to ease and more flights are able to take to the skies once again.
Decline in Toll Road Traffic Temporary, Ports Remain Stable
For toll roads, the impact of coronavirus has been severe, but we can expect a faster recovery than for airports. In 2020, Europe’s road traffic is expected to decline by 15%-25% on average, after nose-diving 70%-80% during lockdowns in Italy, Spain and France. Meanwhile, in the U.S. and Canada, traffic is declining by 40%-70%, on average, during the lockdown period.
In the Asia-Pacific region, too, toll roads are feeling the liquidity strain from lockdown measures. Many SSEA countries are experiencing sharp declines in cash collections, while rating pressure on sovereigns and softer state support for key counterparties may pose further downside risks. Notably, in China, a moratorium on toll road fees is also expected to lead to dramatic revenue losses in the sector, with our estimates indicating a loss of $38 billion or more in 2020 alone.
Nonetheless, toll roads are expected to make a faster and stronger recovery than airports, once normal economic activity resumes. By and large, toll road assets have seen higher resilience of heavy-truck traffic during lockdown — which has served as an important mitigant — although a recession will likely weigh on future heavy traffic levels.
Credit quality for seaports, meanwhile, is at medium risk following the COVID-19 outbreak. Seaports’ sensitivity to the outbreak is unlikely to be as protracted as airports, though the wider economic downturn could negatively impact cargo volumes. Overall, we anticipate annualized volumes for seaports to fall by 10%-15% on average this year, with container goods hit harder than bulk.
An Uncertain Recovery
Levels of exposure to the current pandemic might vary among project types, but the lessons learned could be more uniform. As the recovery takes shape, corporations and countries need to ramp up preparations for low-probability, high-risk and massively disruptive events in the future, whether they be pandemics or weather events. In this respect, we can anticipate that — above all else — the importance of environmental, social and governance considerations for the sector will likely intensify.
The recovery ahead for the airport asset class will undoubtedly be complex and prolonged. Airports have been a highly resilient asset class able to ride out shocks compared to other investment types, as seen by its fast recovery path following the global financial crisis or 9/11. This time, however, the challenge is much greater and of a different nature. With that in mind, it’s yet to be seen how seismic the changes in consumer behavior — and indeed the strength of its key counterparties, the airlines — will eventually be in the post-lockdown environment.