Pictures Of Long Roads – Starting May 1, BRINK Asia’s coverage will be integrated with BRINK and will now include more regional coverage on risk and resilience issues.
Highway junction in Dubai, United Arab Emirates. For toll roads, the impact of the coronavirus is serious, but we can expect a faster recovery from airports.
Pictures Of Long Roads
As the coronavirus pandemic continues to disrupt the global economy, the infrastructure asset class faces greater challenges today than it did during the global financial crisis. Infrastructural assets linked to the movement of goods and people are highly exposed to the measures to control the spread of infection, and lockdowns have brought much of the world to a near standstill.
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More broadly, the pandemic dampened economic activity, and the global economy entered recession. The World Trade Organization predicts that in 2020, the volume of global trade could fall by 13% to 32%. S&P Global Ratings predicts that global gross domestic product could fall by 2.4% this year.
These factors have led to unprecedented rating pressure on infrastructure assets, especially airports. While infrastructure is highly resilient in long-term scenarios (the asset class outperforms non-financials in crisis environments), it is not immune to the current pandemic.
In particular, downward pressure on sovereign credit quality in emerging markets exacerbated the downgrade. In Latin America, for example, since the outbreak, S&P Global Ratings has taken negative rating action on more than 60 Latin American infrastructure entities in its portfolio. In South and Southeast Asia (SSEA), we see downward pressure on a quarter of infrastructure and utilities ratings.
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Of all infrastructure assets, airports in particular will face a prolonged recovery, which is why we have downgraded 11 airports since March 2020. Aviation agency IATA estimates that air passenger traffic in most regions will decrease by around 50% this year.
Additionally, we assume that air traffic will continue to decline by 25% to 30% in 2021 (compared to 2019 levels), with a full recovery not expected until 2024 due to some form of social distancing measures, international travel restrictions and quarantine measure. likely to continue until a vaccine is found. A slow recovery could also coincide with structural changes, such as possible reductions in business travel and reductions in airline fleets.
As the recovery takes shape, businesses and countries need to increase their preparedness for future low-probability, high-risk, and massively disruptive events.
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Since airlines are under much more pressure than airports, it’s no surprise to see most of the government’s bailout efforts going in their direction. In the US, for example, the aviation industry received $25 billion in funding from the Treasury Department, and other governments are expected to follow suit. The scale of the disruption has drained this money at an alarming rate (to process refunds for canceled flights and service a huge cost base). However, spending is expected to slow once quarantines begin to ease and more flights can fly again.
For toll roads, the impact of the coronavirus is serious, but we can expect a faster recovery from airports. During the quarantine in Italy, Spain and France, road traffic in Europe is expected to drop by an average of 15%-25%, and in 2020, European road traffic will drop by 70%-80%. Meanwhile, in the US and Canada, traffic fell by an average of 40%-70% during the quarantine.
In the Asia-Pacific region, toll roads are also feeling liquidity pressure due to quarantine measures. Many SSEA countries are experiencing a sharp decline in cash receipts, while pressure on sovereign ratings and weak country support for key counterparties could pose further downside risks. In China, the toll moratorium is also expected to result in a major loss of revenue for the industry, which we estimate will cost $38 billion or more in 2020 alone.
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However, when normal economic activity resumes, toll roads are expected to recover faster and stronger than airports. Overall, toll road assets have shown greater resilience to heavy truck traffic during the lockdown – an important mitigation measure – although the recession could affect future heavy traffic levels.
Meanwhile, the credit quality of the seaport is at medium risk following the outbreak of COVID-19. Seaports are unlikely to be as susceptible to the outbreak as airports, although the wider economic crisis could have a negative impact on cargo volumes. Overall, we expect annual cargo volumes at seaports to fall by an average of 10%-15% this year, with containerized cargo more affected than bulk cargo.
Exposure to the current pandemic may vary by program type, but lessons learned may be more uniform. As the recovery takes shape, businesses and countries must increase their preparedness for future low-probability, high-risk, and mass-disruptive events, whether pandemics or extreme weather events. In this regard, we can expect – most importantly – that the importance of environmental, social and governance issues for the industry could increase.
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The recovery of the airport asset class will undoubtedly be complex and time-consuming. Compared to other types of investment, airports have always been a very resilient asset class, resistant to shocks, as evidenced by the rapid recovery path after the global financial crisis or 9/11. This time, however, the challenge is greater and of a different nature. With that in mind, it remains to be seen how much the changes in consumer behavior – and the strength of their major competing airlines – will ultimately play out in the post-quarantine environment.
Karl Nietvelt is head of global infrastructure research at S&P Global Ratings. He has 20 years of credit experience in utilities, commodities, infrastructure and project finance and oversees S&P’s research on infrastructure and energy transitions.