How elections, debt will impact Argentina's and Chile's infra sectors

A report by Moody's Investors Service cited the May 7 election related to Chile's new constitution and Argentina's presidential and parliamentary elections on October 22 – where the ruling party faces an uphill battle – as potential infrastructure sector risks.

BNamericas talks to Moody's VP and senior analyst Daniela Cuan to gain insight into how specific risks could affect companies in both countries.

BNamericas: How much of a problem are debt maturities for infrastructure companies in Chile and Argentina?

Cuan: Debts companies in Argentina restructured will mature this year due to central bank regulations. In mid-2020, companies that had maturities in US dollars could pay 40% of the debt and refinance the remaining 60% with an average period of two years.

Some of those maturities are falling due this year, and the question is what the central bank will decide. For example, in August, September or October 2020 you paid US$40mn and refinanced US$60mn over two years. That US$60mn will be due in the middle of this year. The question is if the central bank will provide access to those dollars.

Regulations say the bank provides access, but the reserves are under some pressure. In Argentina, no company with debt in dollars has access to those funds and always must resort to the central bank.

In Chile, any refinancing will be done at higher rates, and those with maturities in 2023 will face higher financial costs. There is also more volatility, and we have seen in the last year that access to the international market was very restricted, with very few issues from companies in that country.

This is partly due to market conditions, because interest rates have risen to a level Chilean companies were not used to. While this has improved a bit recently, we don't see a very active market for Chilean companies.

BNamericas: Your report said raising rates will be difficult in Chile due to social demands. How will that affect companies?

Cuan: In 2019, highway concessionaires agreed to not raise tolls above general inflation, but these rates continue to evolve normally.

Electricity rates are extremely sensitive, since the market has been very volatile and faced higher-than-expected price increases. The transfer of these generation costs to [consumer] rates is a very sensitive issue, especially because of what happened with the increase in public transport fares in 2019, [triggering a social uprising].

Electricity rates were frozen for a while with the expectation that tenders with lower prices would be launched, but the application of new transmission and distribution rate structures has also been long delayed.

The implementation of [rate stabilization fund] PEC 2 has also been delayed, affecting generation companies, because their liquidity is under a little pressure.

BNamericas: How is Argentina's electoral cycle affecting the infrastructure outlook?

Cuan: Argentine firms that deal with final consumers face a significant rate delay. They are always running behind. The government is trying to reduce subsidies gradually, but that always impacts more the generation cost and not so much the distribution margin.

One measure the government took was to compensate somehow what companies owed to [market administrator] Cammesa, after which they faced less pressure. But it will be difficult to withdraw subsidies that have been announced. On top of that, a new rate adjustment has been announced which will affect consumers' pockets with the inflation we see.

I don’t see how distributors recover costs with these inflation levels in an election year.

Regarding generators, rates for selling base energy, or without a contract, to Cammesa were dollarized again, which provides some price certainty.

Finally, the election year can affect generation companies with long-term generation contracts in several ways. In principle, these are contracts in dollars and have always been fulfilled, despite significant delays by Cammesa, which depends on finance ministry transfers, and this is an everyday risk.

BNamericas: Does the election related to Chile’s constitutional process represent a risk for the infrastructure sector?

Cuan: That possibility is not part of our baseline scenario.

Even with the previous proposal for a new constitution, we did not see significant effects for infrastructure firms. We have not seen anything that changes the rules of the game.

We saw in that proposal a strong focus on the environment and citizen participation in the environmental assessment process. We worried that environmental evaluation processes were already quite extensive and with an emphasis on these issues and greater public participation, evaluation periods could extend even more.