S&P Global Ratings expects credit conditions in Latin America to worsen as the COVID-19 pandemic advances in the region. As the virus spreads, governments are already taking measures to contain it that range from mandatory country quarantines to travel bans and mobility restrictions. In this new context, and considering the global threats, we updated our forecasts for the region. We now expect Latin America to fall into a recession in 2020, recording its weakest growth since the Global Financial Crisis (GFC). More precisely, we forecast the regional GDP to contract 1.3% in 2020, and then to converge to growth again by 2021.

We predict the infrastructure sector to remain highly vulnerable in the short to medium term. This is because most infrastructure assets correlate to economic performance, have a regulated nature, and have had cash flow generation hurt by the measures imposed so far by several governments. Thus far, we've taken negative rating actions on more than 60 infrastructure entities in our portfolio. These actions mainly resulted from the recent sovereign movements--we downgraded Mexico and Trinidad and Tobago and revised the outlooks on Brazil to stable from positive and on Colombia to negative from stable--and also from our expectation of weaker financial performance, particularly in the transportation sector (airports, toll roads, ports, and mass transit) that has been severely affected by the mobility restrictions.

We believe that downside risks are still significant. A prolonged pandemic and/or a further drop in oil prices will put additional pressure on the local economies and indirectly on sovereign ratings, particularly those that currently have fiscal imbalances. If this situation materializes, infrastructure entities in the region will be subject to additional challenges.

The Path To Economic Recovery From COVID-19 Remains Uncertain

The severity of the coronavirus pandemic resulted in a sudden slowdown in global economic activity. What started as an issue for China and its close economic partners in late 2019 and early 2020 has turned into an unprecedented global event that has exacerbated market volatility, capital outflows (particularly from emerging markets), and increased credit stress. In this context, we revised our forecasts and now predict a global recession this year. We expect 2020 global GDP will rise just 0.4%, with roughly 2.9% growth in China but a contraction of 2.0% for the Eurozone and one of 1.3% for the U.S. (see "Global Credit Conditions: Triple Trouble: Virus, Oil, Volatility," April 1, 2020).

Latin America is no exception. As mentioned above, we expect the region will post its weakest growth since the GFC. We forecast Latin America's GDP to contract 1.3% in 2020, and then bounce back to 2.7% growth a year later. Our estimates consider all responses that governments have been implementing in the past month to contain the rising number of infections. Those measures vary significantly from one country to another--for example, Argentina, Chile, Colombia, Panama, and Peru enacted nationwide quarantines in the past couple of weeks, while Brazil and Mexico delayed and then enacted partial quarantines.

Table 1

The Infrastructure Sector Will Remain Highly Exposed To Risks In These Conditions

Most of the infrastructure assets in the region are exposed to local economy dynamics, to regulation (because by nature they depend on tariff adjustments or operate with regulated prices), and to government-related revenue counterparties. Therefore, we continue to expect a high correlation between their performance and the economies of the countries where they operate.

Moreover, and as explained above, since COVID-19 has spread in the region, we've seen several mitigating measures from local governments that intended to contain the outbreak, but that have severely affected the operation of different sectors, including airports, toll roads, subways, and to a lesser extent ports. These measures started in mid-February 2020, with specific jurisdictions (where there was evidence of local circulation of the coronavirus) implementing travel restrictions. However, the situation evolved rapidly, and restrictions tightened in a matter of weeks until they turned into either voluntary or mandatory quarantines (depending on the country) that restrict non-essential workers from leaving their homes apart from buying groceries or medicine. As a result, passenger and vehicle traffic at major airports and roads dramatically decreased, as illustrated by traffic drops of more than 80% and 50%, respectively. We believe these four transportation subsectors are the most exposed under the current conditions, followed by midstream assets with some level of commodity risk, and then by regulated utilities that will be exposed to energy demand reductions and potentially delays in payments from customers or tariff freezes.

A Closer Look At The Potential Impact To Infrastructure

Airports

The high risk to the airport industry comes from the severity of lockdown measures across the globe, which caused air traffic demand to plunge in recent weeks. Our current base case for global air passengers in 2020 assumes a decline of between 20%-30% from 2019, with full recovery achieved only by 2022-2023 (see our article, "The Coronavirus Pandemic Could Reduce Global Air Passengers By Up To 30% In 2020," March 17, 2020).

While we view global airport ratings as likely to come under pressure, in Latin America the majority of our rated portfolio has financial flexibility in the form of comfortable liquidity and relatively low leverage metrics, allowing room to absorb a drop in revenues of over 50% in 2020. In our portfolio, we see higher risk to the ratings on Uruguay-based ACI Airport Sudamerica S.A.. We lowered our rating on it to 'BB' from 'BBB' and placed it on CreditWatch with negative implications on March 27 to reflect the lower-than-expected financial metrics this year.

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Ports

Ports in Latin American are now starting to have lower trade volumes, because ships usually take several weeks to arrive from Asia and Europe, which are the main origins and destinations of the region's cargo.

In Brazil, we rate two container terminals, Santos Brasil Participações S.A. (brAAA/Negative) and Terminal de Contêineres de Paranaguá S.A. (brAAA/Negative/brA-1+), which could be significantly affected considering their exposure to foreign trade, especially imports from China and exports to Europe. We estimate a drop of over 15% of containers handled in Brazil for 2020, with continued downside in 2021 following a global trade recession.

In Peru, we also predict the port of Paita (BB+/Stable) will have a drop in activity of about 5%, but it still has some cushion under its financial metrics. At this point, the traffic through the Panama Canal (A/Stable/--) continues to be stable, except for cruise lines that represent a marginal portion of revenues.

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Toll roads and mass transportation

We believe volume-based toll roads will be highly exposed under the current scenario. The main difference from other economic crises is that the stopping the pandemic relies on imposing mobility restrictions that have resulted in drops in commuter traffic of more than 50% in the past few weeks in some countries, such as Brazil and Chile. Still, unlike airport traffic, we expect toll roads' traffic to rebound by the end of 2020, as commuters resume normal daily activities.

The coronavirus pandemic added to the already weakened coverage metrics cushion of the Chilean toll roads affected by the government's decision to freeze the tariff adjustment after the protests that the country faced in October 2019 (see our article "Chile's Social Spring Could Ripple Through The Corporate Sector," Nov. 20, 2019). As a result, on April 6, we revised our expectations for the operating performances for Chilean toll roads Sociedad Concesionaria Vespucio Norte Express S.A., Sociedad Concesionaria Autopista Central S.A., and Sociedad Concesionaria Costanera Norte S.A.. Moreover, we recently revised the outlook on Empresa de Transporte de Pasajeros Metro S.A. (Santiago Metro) to negative from stable, while affirming the 'A+' ratings, to incorporate the 40% tumble in the level of passengers in 2020 and its consequent liquidity deterioration.

In addition, we're closely monitoring the seven toll roads we rate in Mexico, where weaker GDP expectations, as well as sanitary requirements that are delaying exports to the U.S., may further reduce their debt coverage metrics. We started to see drops in traffic volumes mainly in the second half of March, with overall decreases of between 5% and 10%, and we expect the decrease to peak in April and May as the mobility restrictions increase and the coronavirus cases likely hit their peak. We believe most of the toll roads have some financial flexibility; however, we expect that subordinated series would be the most pressured.

Similarly, we continue to monitor our rated Brazilian toll roads, because preliminary figures indicate traffic levels decreasing by 20%-30%, resulting from a combination of a 50% traffic drop in light vehicles and about 10%-15% of heavy vehicles, depending on the region where the toll roads are. Nevertheless, in general toll roads in the country are owned by large groups that operate portfolios of assets, allowing greater financial flexibility. In addition, we cap most of our ratings on these toll roads by the sovereign ratings, so there's is a cushion to absorb a drop in cash generation without immediately affecting the ratings. On the other hand, we recently lowered the ratings on Investimentos e Participações em Infraestrutura S.A. (Invepar) to 'CCC' from 'CCC+', with a negative outlook, because the group faces increased refinancing risks--the holding company has a large debt maturity in April 2021, while credit market conditions have worsened significantly. We believe the impact of the COVID-19 pandemic will significantly hurt the operating performance of Invepar's main assets (toll roads, an airport, and mass transit).

Finally, we downgraded Peruvian toll road Rutas de Lima S.A.C (RdL) to 'CCC' from 'B' and placed the ratings on CreditWatch negative. The rating action incorporates our expectation that RdL's cash flows available for debt service won't be sufficient to cover the next 12 months debt service. However, the company might pay the next two coupon payments with its existing cash and cash equivalent of about PEN8 million and proceeds from the six-month debt service reserve account (DSRA). However, the inability to keep the six-month DSRA fully funded would constitute a breach of covenant, triggering an event of default.

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Refineries

The sector might see increased risks due to the plunge in oil prices (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020), as well as an expected decrease in demand of 25%-30% in March and April. However, our rated portfolio is composed of government-owned entities, which have a degree of extraordinary support in case of unforeseen events. For instance, in the case of Petroleos del Peru Petroperu S.A. (BBB-/Stable/--), the government has provided, through a Necessity and Urgency Decree, the possibility for the company to access to financing from the national bank, at convenient interest rates, during 2020 in case of operational or investment needs. Consequently, in general we do not anticipate rating actions in this sector.

Electric utilities and power generation

In Chile, we don't predict an immediate impact to power generators, even if economic conditions worsen, because most of the rated entities in our portfolio have strong cash balances, some cushion under their financial risk profiles to absorb a temporary spike in leverage, and the flexibility to postpone ongoing investment plans. Still, the downside risks come mainly from two fronts:

• Lower demand from distribution and mining companies, considering that those contracts are take-and-pay and can adjust volumes under a down cycle scenario; and
• Execution of ambitious renewable investment plans, because some equipment comes from Asia and might face delays.

The exceptions are smaller renewable projects that are exposed to market risk. We also monitor the exposure that some generation companies may have to mining entities, which could suffer from the recession.

Regulatory risk and foreign exchange (FX) exposure are at the center of our risk assessment of the sector in Argentina--these exposures were already at relatively high levels before the pandemic. We will continue monitoring the situation and expect negative rating actions if the cash flow from operations worsens more than expected.

At this point, we do not anticipate major issues in Brazil and Colombia, where bulk of utilities and generators' revenues and EBITDA come from the more resilient residential segment and the energy matrix is more than 60% from hydro, i.e. under the first quartile of energy production cost. Nevertheless, we will monitor counterparty risks for the generators, and whether contracts (especially in Brazil) could be subject to renegotiation of terms, including contracted volumes and prices. For the distributors, weaker economic activity will likely translate to lower energy demand from industrial and commercial clients, and higher delinquency and losses from residential clients. In Brazil, the regulator announced that distributors are prohibited from disconnecting delinquent residential customers over a 90-day period. In our view, the impact depends on the concession area of each distributor, but overall this should result in higher working capital needs, until this effect is incorporated into tariffs, although the timing for this is uncertain. Further measures aiming to alleviate the burden of regulated utility bills for end-customers could be a risk to the credit profiles of these entities.

In our view, the downside risks are moderate in Peru. Even considering the recession scenario, the impact to utilities and generators should still be manageable. We don't anticipate rating actions on Peruvian entities in the sector at this point.

Finally, in Mexico, the main risk relates to the sovereign and its ability to support Comisión Federal de Electricidad (CFE; foreign currency: BBB/Negative/--; local currency: BBB+/Negative/--). Given CFE's importance as the country's only distributor and transmitter of electricity, we equalize the ratings to those on the sovereign, based on our view of an almost certain extraordinary support in case of financial stress. CFE is also the off-taker of some projects, which limits their credit quality to that of CFE and the sovereign. We'll monitor the impact of weaker economic activity on CFE, since it could translate to lower demand from industrial and commercial clients.

Water utilities

Historically, water utilities have been very resilient to economic downturns, given the essential nature of their services. However, there could be potential downside risk because regulated utilities are ultimately exposed to political interference, such as emergency measures to ease the negative economic impact to the general population. In addition, given their regulated nature, the ratings are usually constrained by those on their sovereigns. In this context, we rate Sabesp at 'BB-/Stable' (the same level as Brazil), while we rate Aqualectra 'BBB/Negative', aligned to the rating on Curacao.

Gas pipelines, transmission lines, and social infrastructure

Most of these rated assets are availability based, and therefore don't depend on demand levels or commodity prices, lessening their overall exposure to the COVID-19 impact. However, we may see some fallout if credit quality of key counterparties weakens.

Availability-based social infrastructure projects in Mexico have a revenue counterparty of government-related agencies/secretaries, which we already assess as two notches weaker than the sovereign. Thus, we could revise the credit quality of these entities if we see an overall deterioration of Mexico's financial flexibility to support them. Moreover, we could see weakening in those assets if Mexico's fiscal pressure increases, which may disrupt the priority of payments under the service agreements from these government entities.

Infrastructure Entities Are Under Pressure And Could Face Additional Turmoil

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

We predict that the infrastructure sector in Latin America will remain highly vulnerable in the next few months. Along with the rating actions we've already taken, if the outbreak lasts longer than predicted or if oil prices drop further, we could see additional rating actions on entities in the sector. We consider the highest-risk sectors to be airports, toll roads, public transportation, and ports because of the government restrictions that limit movement, but we'll continue to monitor the impact to all infrastructure sectors.

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