Currency volatility magnifies infra project risks

Compounded by the strong US dollar, currency devaluation is increasing foreign exchange risks for infrastructure projects, according to a new report from Fitch. 

“Multiple currencies are at their lowest levels in over a decade due in part to waning demand for commodities, particularly copper and oil,” said Fitch managing director Glaucia Calp in a statement. “That, coupled with a USD that was up 78 percent over various Latin American currencies through February, has created a situation where [foreign exchange] risk is heightened – and at the same time more difficult to mitigate.” 

In the 4G highway programme, where progressing road projects have heavily relied on the private sector for momentum, Fitch noted two types of foreign exchange risk. 

“US dollar depreciation could limit pesos available to pay for date-certain fixed-price construction-related contracts,” Fitch's report notes. “Conversely, USD appreciation could affect debt service in some specific instances.” 

The increased difficulties, Fitch noted, are due to limited availability or complete lack of hedging options since “long-term exposure to a country or currency is undesirable”, and even where hedging is possible, “the local market may lack sufficient liquidity or be prohibitively expensive”. 

The ratings agency noted that foreign exchange risks occur in projects with a revenue/debt mismatch and projects with life-cycle costs. While potential risks can be mitigated through revenue indexation and other mechanisms which allocate grantors the majority of risk, Fitch's view is that these mechanisms are “imperfect”, considering their use in its ratings decisions.