S&P warns of growing ‘external risks’ in South and Southeast Asia

With upcoming elections in several countries, political uncertainty is one of several factors that may lead to ‘some slowdown’ in the region this year, but the impact on the infrastructure sector is not expected to last.

S&P Global Ratings is urging infrastructure companies in South and Southeast Asia to be financially prudent as they face growing “external risks” linked to tightening funding conditions, interest rate hikes and upcoming elections in 2019.

“The past year demonstrated that political events have important implications for the infrastructure sector in the region,” the ratings agency said in a report released this week, citing a pre-election electricity tariff cap in Indonesia and the cancellation of infrastructure projects in Malaysia after a new government was elected last year.

The Philippines, Thailand, Indonesia, and India will go to the polls in 2019, while Malaysia might experience a power transfer among government leaders this year.

“Any move towards or away from government-led infrastructure spending due to political changes will determine the growth trajectory of SSEA infrastructure companies over the next three to five years,” S&P said. “Nevertheless, we don’t expect any significant impact on existing projects and cash flows.”

Similarly, the ratings agency lists exposure to possible interest rate hikes and an end to the fall of debt prices as other obstacles infrastructure companies in the region will face.

The report stresses that independent power producers and transportation companies “are more likely to feel the heat from negative external events,” due to their exposure to market demand and rate hikes.

“An appropriate capital structure may not be the one that optimises leverage but one that leaves ample cushion to absorb likely surprises,” according to the report.

Despite this, the study predicts a “moderate” increase of revenues between 5 and 7 percent over the next one to two years, and operating conditions to remain stable.

Only three of the 24 companies analysed had a negative rating outlook.

Moreover, the rating agency argues that a period of financial discipline might help some of the firms in the region. “It may enable some companies to consolidate their financial positions and restore them to healthier levels,” Abhishek Dangra, a director at S&P Global Ratings, told Infrastructure Investor.

“A case in point is the Indian renewables sector, which has been growing at 50-100 percent [levels] over the past few years,” he added. “High leverage, with debt/EBITDA of around 8x, EBITDA interest coverage of just around 1x and high capex, can create financial pressures for companies if they don’t exercise financial discipline while pursuing growth.”

He expects India will shift its focus to transmission and distribution, perhaps evaluating opportuntities for privatising “the ailing distribution sector on a selective basis”.

But, airport privatisations will “lead the charge for PPPs” in the country, “given the high-quality assets and strong passenger growth in airports built by the private sector,” Dangra said. He did, however, acknowledge that the bundle of six airports the country is currently looking to privatise could get delayed due to elections scheduled to take place in May.

At the same time, he believes that successful experiences from recent years will encourage governments in the region to keep expanding private participation in the infrastructure sector.“All countries in the region (barring the Philippines […]) currently seem keen on greater private participation in infrastructure development,” Dangra said. In addition to India’s ongoing privatisation of airports, he also referred to the country’s roads privatisation as well as growing interest in Indonesia’s transportation sector.

“The success for PPPs will depend on whether commercially feasible projects are offered with balanced risk-sharing and fairly predictable regulatory and contractual environments,” he said.

While current conditions may “result in some slowdown, […] we still expect infrastructure to remain a focus for many SSEA countries to drive economic growth and help bridge the existing infrastructure deficit,” Dangra explained.

“Periods before elections and post elections may result in greater uncertainties, impacting spending and future growth plans. After a short period, we expect infrastructure spending to again pick up some pace once the policy directions of new or existing governments (if re-elected) become clearer,” he concluded.