India outlook negative says Fitch

Ratings agency Fitch Ratings presents a poor outlook for Indian infrastructure projects with challenges related to the macroeconomy and specific to the industry itself expected to increase.

Fitch said project companies remained under pressure from: equity capital constraints; high interest rates; slowing GDP growth (6.5 percent predicted for 2012, compared with an average of 7.4 percent for the years 2000 to 2012); currency depreciation; fuel shortages; weak off-takers; execution delays for power projects; and prospects of slowing traffic growth for transport projects.

The number of negative rating outlooks in Fitch’s portfolio is now 24 percent, compared with 19 percent seven months ago. The agency said the latest figure would have been higher if not for non-contractual support from sponsors – and the expectation that, in many cases, this support will continue.

Fitch said it believed that sponsors with stretched balance sheets will struggle to raise funds for a growing number of construction projects and to support under-performing assets, largely because of a weak and volatile stock market. It said that developers may be forced to “selectively support” projects with a long-term economic value in contrast to the earlier strategy of “preserving bank relationships by propping up projects”. It said this could lead to some project loan defaults and debt restructuring programmes.

Power projects, Fitch predicted, would “continue to grapple with fuel shortages and weak off-taker utilities”. It said that, in spite of the recent fall in global coal prices, power generated from imported coal will still be expensive “given financial distress for several off-taker utilities”. The benefit of falling coal prices is also negated by the weak rupee. 

In addition, Fitch predicted that economic slowdown could moderate traffic growth expectations for the transport sector, including toll roads and airports.

The 2012 Mid Year Outlook: Indian Infrastructure report concluded by offering some potential remedies. It said that lower interest rates, a rebound in economic growth, renewed investor appetite facilitating equity flows into infrastructure and a strengthening rupee could “help stabilise the credit quality” of infrastructure projects.

“Government action aimed at removing hurdles to timely project execution, addressing fuel scarcity and initiating sector reforms (e.g., strengthening utilities) could also help preserve the credit quality” the report added.