The Fiscal Cliff could trigger a second recession, a 2% decline in GDP to flat 0.4% growth, and increased unemployment to upwards of 10%, all which would dramatically affect demand for U.S. transportation assets, according to a report by Fitch Ratings.
"Given the far-reaching effects of the Fiscal Cliff, it is not expected that Congress will allow these tax and spending cuts to take effect. But were it to occur, the effect on airports, roads, tunnels and bridges could be significant and could pressure ratings," said Michel McDermott, Managing Director and head of the U.S. Transportation team.
Under the cliff scenario, Fitch would expect airport volumes to range from flat to a decline of 5%depending on the nature of the market served.
Fitch would expect road, tunnel, and bridge facilities to suffer smaller declines than those experienced in the 2008-2009 recession, because employment levels have not returned to prerecession levels, and the depth of the cliff scenario, as currently envisioned, is milder than the recent recession. However, performance will vary depending on the nature of the facility and its role in the transportation network.
While most ratings are not immediately affected by slowing growth or volume reduction, facilities with annual debt service obligations that increase over time, and those with less pricing power will have more rating pressure if revenue grows more slowly than debt service.
Issuers that Fitch classifies as having a strong franchise may have flexibility to raise tariffs to maintain financial and operational flexibility consistent with existing ratings. However, issuers with more mid-range or weaker franchise strength will need to consider other strategies, including cost cutting and deferral of capital investment to maintain current levels of financial and operational flexibility. Many issuers have used a combination of tariff increase and cost cutting in response to the recent recession and may have less room to maneuver in a second recession.
Although 2012 GDP and related growth in transportation activity has been tepid, data tracked by Fitch as it monitors credit ratings for U.S. public infrastructure facilities, reflect an economy that is growing.
"Traffic on roads, freight indices, and airport traffic all point to an economy on a somewhat surer footing," said McDermott.