Currency devaluation and market volatility are increasing risk exposure for major transportation infrastructure projects, according to a new report from Fitch Ratings.
Currency devaluation in the face of a strong U.S. dollar and market volatility is increasing foreign exchange (FX) risk for transportation infrastructure projects, according to a new report from Fitch Ratings.
Currency exchange risk occurs in projects with a revenue/debt mismatch, operating expenses/debt mismatch, or lifecycle costs, said Fitch.
The report noted that currency hedging may be limited, or unavailable, in certain cases because long-term exposure to a country or currency is undesirable, and even where possible, the local market may lack sufficient liquidity or be prohibitively expensive.
“Potential FX risk can be mitigated with revenue indexation or mechanisms that allocate the grantor most of the risk,” Fitch said in the report. “These indexing mechanisms are imperfect, exposing project structures to some level of risk through exchange timing or measurement limitations. Fitch considers such risks when assigning a rating.”
The report cited the 4G highway project in Colombia as an example of a project that poses two kinds of FX risk. Depreciation of the U.S. Dollar could limit the amount of pesos available to pay for date-certain fixed price construction contracts, while conversely, USD appreciation could affect debt service in some specific instances.
“Multiple currencies are at their lowest levels in over a decade due in part to waning demand for commodities, particularly copper and oil,” said Glaucia Calp, managing director at Fitch. “That, coupled with a USD that was up 78% over various Latin American currencies through February, has created a situation where FX risk is heightened – and at the same time more difficult to mitigate.”
Fitch: FX volatility increases risk for infrastructure projects
