articles Ratings /ratings/en/research/articles/200406-covid-19-emerging-market-local-governments-and-non-profit-public-sector-entities-face-rising-financial-strai-11422899 content esgSubNav
In This List

COVID-19: Emerging Market Local Governments And Non-Profit Public-Sector Entities Face Rising Financial Strains


Instant Insights: Key Takeaways From Our Research


Credit FAQ: Unpacking Angola's Debt Vulnerabilities


Credit FAQ: Will The TMX Expansion Project Move The Needle On U.S. Refiners' Credit Quality?


Sovereign Ratings List

COVID-19: Emerging Market Local Governments And Non-Profit Public-Sector Entities Face Rising Financial Strains

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: ). As the situation evolves, we will update our assumptions and estimates accordingly.

The magnitude of the impact of the COVID-19 outbreak on the credit quality of international public finance (IPF) entities that we rate will depend on the length and severity of the economic disruption.

This report covers public finance asset classes that we rate in various countries outside the U.S. In the graphs below, we refer to low, medium, and high potential risks to these entities' financial performance, for example, due to lower revenues or higher spending. In the absence of mitigating factors and if the response to COVID-19 is sustained over time, while other factors remaining unchanged, weaker financial performance could eventually impair creditworthiness.

Public-Sector Operators Likely To Take The Biggest Hit In 2020 From Containment Measures

COVID-19 measures such as social distancing and travel disruptions worldwide will dent revenues of universities, public transport operators, and several U.K. social housing providers. The latter, which are active in housing development for sale, are vulnerable to the housing market freeze. With limited social interaction due to the pandemic, the U.K government effectively put the housing market on hold a few days ago. Also, much stronger demand for healthcare and social care services raises costs of public hospitals and care provides.


Public Universities Services Disrupted, While Facing Increasing Operating And Financial Uncertainties For The Rest Of 2020

Global travel disruptions will hinder the ability of some public universities to begin the academic year in September. In the case of Australia, where the academic year starts in March, the second semester this year could be at risk if travel restrictions and social distancing measures continue and campuses remain shut down. While domestic students may be more willing to enter studies during the time of economic uncertainty, international students may start studying in January or March 2021, skip the academic year entirely, or opt to study in their country of residence. If this situation persists, we will likely observe decreasing operating margins, given that fees from international students are generally higher than those that domestic students pay, while expenditures remain rigid. Universities may have to adjust to a "new normal" to maintain their operations, quality of their programs, and overall reputation.

Ability to attract international students has been always a strength of leading universities in Australia, Canada, and the U.K. Travel restrictions and increasing uncertainties over how universities would keep operating under more stringent circumstances lead us to assess risks as higher for non-U.S. universities we rate than for other sectors. Mexican universities face with moderate risks because they mostly rely on federal and state government funding for their operations, with very low dependence on student fees. Given that these universities don't have debt, or it's currently manageable thanks to existing liquidity, only a major disruption in their operating margins could erode creditworthiness. Graph 1 indicates the higher risks we perceive for universities during 2020.

Transport Infrastructure Entities And Public Transport Operators Suffer From Vanishing Demand, But Access To Funding Mitigates Short-Term Liquidity Risks

The rapid spread of COVID-19 and global travel restrictions have triggered a significant reduction in passenger volumes among rated Canadian airports and global public transport operators. We believe that they would have sufficient resources to absorb the projected revenue shortage, given the existing liquidity and support from governments. However, there are uncertainties over the medium-term financial implications stemming from reduced mobility associated with the COVID-19 travel restrictions and economic fallout. On April 1, 2020, we revised the outlook on six airport authorities, the Canadian civic air navigation service provider (NAV CANADA), and an operator of the Canadian side of four international bridges (FBCL). Prolonged travel disruptions could have a more tangible impact on their financial performance. While we have seen some support from the federal government in Canada, it isn't sufficient to compensate for the fall in passenger volumes, and we're not sure if any further support is forthcoming to avoid negative rating actions in the next 12-24 months.

The negative outlook on Transport for London (TfL) since Nov. 13, 2019, indicates our view that its financial profile is stretching, leading to declining cash balances at a time of heightened risks as a result of economic uncertainty and delivery of large capital projects. However, we believe that TfL's liquidity of more than £2 billion can cover the short-term financial impact of the disruptions linked to the coronavirus pandemic. And its exceptional access to external liquidity at short notice through the Public Works Loan Board, as well as potential support from Greater London Authority (GRA) and the U.K. government's Department for Transport further mitigate the short-term liquidity risk. We expect debt burden to be higher than we previously forecast. For further detail, see "Bulletin: Strong Liquidity Will Allow Transport for London To Ride Out The Disruption From The Coronavirus Pandemic," published on March 18, 2020.

Expected Government Funding Will Cover Higher Costs At Public Hospitals

We assume that Canadian and French rated hospitals will receive substantial additional grants from the central governments to cover the rapidly rising costs to provide adequate services at the peak of the pandemic. Any meaningful departure from this assumption could have negative credit implications for the sector.

The Social Housing Sector Largely Resilient To Short-Term Economic Difficulties

We believe that during economic recession, traditional social housing providers (SHPs) usually benefit from the countercyclical nature of their services and face manageable impact on financial performance. However, they may experience a temporary spike in arrears in case unemployment rate rises across the countries. Yet we believe that the resulting decline in revenues could be mitigated by government subsidies, paid either directly or via tenants. We also believe that higher costs to provide services to vulnerable customers during the virus outbreak can be offset by lower maintenance and repair costs, which the providers would scale back to a minimum level of urgent safety and emergency repairs.

We believe that the most vulnerable U.K. SHPs are those for which a large share of revenues comes from market sales. So, those are more likely to be strained from the market freeze. Many of them subsidize investment programs with receipts from sales of existing assets or homes developed for sale on the open market. During the active phase of social distancing measures, though, the housing market is frozen and its rebound could be take longer if the economic recovery turns out to be more protracted. The development of new homes would likely be delayed, resulting in lower capital expenditures, mitigating the impact on cash flows. We consider that the U.K. SHPs generally maintain adequate liquidity positions because they built up cash reserves and arranged sizable RCFs(Revolving Credit Facilities)) to cushion against the uncertainties over the past year, mainly related to Brexit.

Pressure on the ratings could arise if SHPs were to face substantially lower revenues, and consequently, margins at their development-for-sale programs, leading to much higher debt burden.

Canadian Pension Funds Face Moderate Risks In 2020

With the recent sell-off in global equity markets, Canadian pensions and pension-fund investment managers will see declines in their assets under management. We expect their prudent investment policies to limit the extent of declines, enabling them to continue to outperform their benchmarks. Thanks to their strong funded levels prior to the pandemic, the pension funds will remain healthy and in a good position to take advantage of opportunities to acquire high quality assets.

Public Sector Finance Agencies (PSFA) Display Resilience To The Crisis

We expect the direct impact from the COVID-19 pandemic on PSFAs to be contained. We believe that the lenders to LRGs will be able to provide extra financing and act as lenders of last resort, if financing from other sources dry up. If the lending growth picks up significantly, some of the municipal lenders could face rating constraints from deteriorating capital bases if such growth increases lending concentration. However, we note governments are taking measures to increase the PSFAs' capacity through capital injections. For example, the government of Norway has approved a NOK750 million additional capital for Kommunalbanken for it to support LRGs, while the government of Canada has strengthened the First Nations Finance Authority's loss-absorbing funds.

Stalling development activity will lead only to a modest expansion of the balance sheets of PSFAs acting as bond aggregators for SHPs in the UK and Canada, in our view. The PSFAs' lending to the social housing sector often acts as pass-through vehicles, and eventual increases in funding costs are transferred to borrowers.

We believe that the main risk to PSFAs' creditworthiness will be a weakening credit quality of the underlying borrowers mainly, stemming from a dramatic increase in leverage.

Central Governments' Limited Support And Lower Transfers From Commodity Sectors Expose LRGs In Latin America, Russia, Central Eastern Europe (CEE), And India To More Economic And Financial Disruptions Than Developed Markets Peers

A projected drop in tax receipts from oil producers will likely bite into budgetary performance of Mexican LRGs and Russian regions. We expect budget deficits to widen in 2020 before they could gradually narrow in the following years in line with a projected recovery in oil prices.

At the same time, a weaker capacity of central governments to provide comprehensive economic rescue packages and tightening access to capital markets will magnify problems for budgetary performance and liquidity of speculative-grade rated CEE cities, LRGs in Argentina, Brazil, and India.

On the contrary, central governments in most developed markets are preparing large financial packages to support local economies, and in some cases, ready to provide additional subsidies to LRGs that may ease financial pressure on public-sector budgets. Consistent access to capital markets and credit lines from the central governments or from state-owned banks will maintain strong liquidity among LRGs in Australia, Canada, Japan, and most of Europe.

Another credit risk for LRGs stems from the overall size of the central governments' additional spending. If greater deficits and debt burden lead to negative rating actions on sovereigns, we may take similar actions on respective LRGs. We believe that local governments rarely can be rated above their sovereigns.

We expect most LRGs to post weaker budgetary performance in 2020 due to lower tax revenues and higher spending pressures, predominantly on health and social care, and public transportation. In addition, we consider that maintenance and capital spending can be delayed, especially in those regions that LRGs have the wiggle room to do so.

Currently, we assume that this trend will be temporary because we expect revenues to rebound in 2021, if the virus is contained over the second half of 2020. However, in case of longer lockdowns or slower economic recovery, a further deterioration of the budgetary performance could weaken LRG ratings in some regions (see graph below).


Aside from the lower revenues amid the generally subdued economic activity, some LRGs are also exposed to volatile performance of particular sectors. Similar to a trend among their Mexican or Russian peers, some regions in Australia, Canada, and Malaysia, and cities in Norway may experience a substantial drop in tax revenue from oil producers. A disruption of the auto manufacturers' supply chain and sagging demand for new durable goods during the recession may undermine tax revenues among German states and some Chinese provinces. However, a strong revenue equalization mechanism and higher transfers from the central government, respectively, should mitigate the impact on the local budgets in 2020. Coastal areas in India and Spain, ski resorts in Austria, Italy, and Switzerland, popular urban tourist destinations, and headquarters of large transport companies suffers from travel disruptions. A potentially weaker performance of government-related entities could reduce their tax payments and require capital injections from their owners.

Some LRGs may also face higher operating expenditure pressures, although they can mitigate structural deterioration by delaying capital expenditures (capex). French LRGs, for instance, should be able to delay capex to offset a likely drop in revenues, given that they have maintained high levels over the past years. Higher healthcare spending will likely put moderate pressure on finances of Australian, Canadian, and regions in Europe, even though most of the costs are set to be covered by additional transfers from the central governments. LRG-owned financial institutions and infrastructure companies may require additional support from their owners in China, Austria, and Switzerland.

Risk Trends, Though In Various Degrees, Rising For LRGs

Following the recent plunge in macroeconomic activity, we have updated risk trends on credit factors for LRGs in Argentina, Australia, Canada, Italy, India, Japan, New Zealand, Russia, and Spain (see graph below). This graph supersedes the one we published in "Rising Sovereign And Fiscal Risks Could Impair Ratings On Local And Regional Governments Outside The U.S.", published on Nov. 20, 2019. We now consider that LRGs will experience sever fiscal pressures and increasing constraints coming from sovereign dynamics during 2020. In the 12 selected countries out of 16, we observe increasing risks on LRGs' budgetary performance and flexibility, while the sovereign rating movements pose risks as well. The latter is evident in our March 26, 2020, outlook revision to negative on four Mexican LRGs, after we lowered our sovereign rating on Mexico to BBB/Negative/A-2, in our March 27 outlook revision on Zagreb to negative.


Liquidity to cover financial obligations and operating expenditure needs is very solid among LRGs in developed markets, while their peers in emerging markets will confront increasing uncertainties over refinancing or tapping sufficient funds to cover budget gaps.

So far, LRGs in developed markets face limited liquidity risks. Most of them retain good access to capital and money markets, while many central governments are providing structural or emergency funding either directly or via state-owned banks. Central banks are buying public-sector bonds within the frames of quantitative easing programs, thereby supplying liquidity to the secondary market.

We expect LRGs in emerging markets (Latin America, CEE, India) to find it increasingly difficult to refinance debt, unless government programs enhance liquidity positions. Liquidity support from the central government is usually less predictable and not necessarily timely, while capital markets are more volatile. As a result, financial management prudence in these markets would become increasingly relevant for their creditworthiness in 2020-2021.

At the end of 2019, we indicated a negative bias for LRG ratings globally. Irrespective of regions, the negative bias for LRGs stems the increasing fiscal pressures and constraints coming from sovereign dynamics, which could be exacerbated if economic recovery takes longer than expected.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Daniela Brandazza, Toronto + 52 55 5081 4441;
Felix Ejgel, London (44) 20-7176-6780;
Secondary Contacts:Stephen Ogilvie, Toronto (1) 416-507-2524;
Anthony Walker, Melbourne + 61 3 9631 2019;
Kensuke Sugihara, Tokyo (81) 3-4550-8475;
Alois Strasser, Frankfurt (49) 69-33-999-240;
Alejandro Rodriguez Anglada, Madrid (34) 91-788-7233;
Carl Nyrerod, Stockholm (46) 8-440-5919;
Sabine Daehn, Frankfurt (49) 69-33-999-244;
Susan Chu, Hong Kong (852) 2912-3055;
Karin Erlander, London (44) 20-7176-3584;
Alexander Ekbom, Stockholm (46) 8-440-5911;
Abril A Canizares, London (44) 20-7176-0161;
Carolina Caballero, Buenos Aires (54) 114-891-2118;
Additional Contact:Roberto H Sifon-arevalo, New York (1) 212-438-7358;

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at


Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in