Scandals, downgrade raise doubt on Brazil airport sales

As Brazilian President Dilma Rousseff begins to tout yet another multi-billion-real infrastructure investment programme, analysts question whether the government will be as successful at drawing international investment in this latest iteration.

Michelle Karavias, global head of infrastructure research at Business Monitor International (BMI), told Infrastructure Investor in a call this week that her team is especially focused on the airport sector. The roll-out of airport concessions, she said, could be “a bellwether for what is going to happen in Brazil” in regard to its infrastructure development ambitions.

“In the previous line of concessions, airports were pretty much the only sector to draw international investors. They hit on so many points of where we raise concern and they were just so successful last time around in terms of premium,” Karavias said. 

“So for us, the airports are going to be a big test, to see if they can repeat that success drawing international players again, whether they will move forward with them, who's going to bid and how successful that is.”

Prior to the uncovering of a massive corruption scandal that seems to have touched nearly every aspect of Brazilian government, BMI was optimistic about the prospects of Brazilian airports' ability to draw international investment. While there is yet hope, “at this point the outlook for the airports is becoming less positive than it was previously”, according to Karavias.

“The thing is with airports, traffic projections are very difficult to pin down anyway, but with the negative economic outlook on Brazil, maybe it's going to be even harder to put out positive traffic projections. That will add another layer of struggling to the airports.”

According to Agencia Nacional de Aviancao Civil, Brazilian air travel demand declined by 1.1 percent in the final half of 2015, with traffic at the nation's two busiest airports (Guarulhos and Galeao) shrinking by roughly 2.3 percent each during that same period. Extrapolating on this data, Fitch Ratings produced a report last month predicting a 2.5 percent contraction in airport traffic during the 2016 calendar year.

The private operator of the Guarulhos airport, Invepar, acknowledged through a spokesperson that macroeconomic compressions are leading to “short-term challenges”, pointing to a weakening GDP, shrinking purchase power of Brazilian consumers and negative effects of currency devaluations as the principle sources of consternation.

The spokesperson was quick to note that despite the setbacks of the last few months, “passenger traffic for Guarulhos has grown considerably from 2012 to 2015-20 percent over the period, 6 percent on a yearly basis”.

Adding to the strain already noted in the sector by the Fitch report is recent news of a further downgrade to Ba3 – junk status – with outlook negative on Brazilian debt by Moody's this past week . Karavias said it is likely this will close off the market to a large number of investors, and that as a result it's “going to be interesting” to see whether private investors will continue to participate.

“It's going to be difficult to attract international investors into the sector. That has been our view for multiple years, and it's only been fermented by recent events – not only downgrades, but also events in the last year or so as the crisis stemming from the corruption scandal has unfolded,” Karavias said. “Our core view has not changed, but this is making it even harder for that to change.”