April 2 (UPI) — After tracing the cost of capital across Latin America in this series, one conclusion stands out: the region’s high financing costs are not a fixed condition. They arise from policy choices and persistent structural weaknesses, both of which can be improved over time.
That matters because the cost of capital remains one of the clearest obstacles to development in Latin America, even if it often receives less public attention than inflation, trade or debt. In emerging markets across the region, the weighted average cost of capital, or WACC, often runs 2 to 5 percentage points above levels seen in developed economies. In practice, that frequently means financing costs of 9% to 15% or more, depending on the country and the sector.
The reasons are familiar. Investors worry about sovereign risk and exchange-rate volatility. In some countries, they also price in persistent inflation and doubts about institutional reliability. The result is straightforward: projects that would be viable in more predictable markets become too expensive to finance in Latin America.
A high WACC does more than raise borrowing costs. It reduces the net present value of projects and raises required returns, discouraging productive investment. Companies that might approve projects yielding 12% or 13% in other environments often reject them in the region because the hurdle rate is simply too high. That leaves less room for expansion and slows growth.
But this is not an unchangeable reality. The cost of capital responds to reform. If countries in the region can reduce it by 2 or 3 percentage points, more projects become viable. Foreign direct investment becomes easier to attract. Productivity gains also stand a better chance of taking hold.
Fiscal credibility
The first requirement is fiscal credibility. A sustainable fiscal policy lowers sovereign risk, which in turn reduces the country risk premium and helps bring down financing costs.
Chile offers a useful example. After adopting its structural balance fiscal rule in 2001, the country saw its sovereign spreads decline and its credit standing strengthen well beyond that of many regional peers. Today, S&P and Moody’s continue to cite the consistency of Chile’s fiscal and monetary frameworks in affirming its strong ratings. The lesson is clear: when markets see discipline and continuity, financing becomes cheaper.
The mechanism is not hard to understand. Lower public debt relative to GDP, together with credible fiscal oversight, gives investors more confidence. Countries that have improved tax administration, kept primary spending under control and redirected public resources toward productive infrastructure have generally strengthened their credit profile over time.
Diversification
The second requirement is economic diversification. Many Latin American economies still depend too heavily on commodities, which leaves them exposed to sudden shifts in global prices and currency markets. That raises risk and makes capital more expensive.
By contrast, economies that broaden their productive base tend to inspire more confidence. Expansion into higher-value sectors such as advanced manufacturing, technology or digital services can produce steadier cash flows and reduce dependence on a narrow export mix. That matters to investors because a more balanced economy is usually less fragile.
Diversification also depends on long-term investment in skills, innovation and productive capacity. These do more than improve competitiveness. They also help lower the level of risk investors associate with the economy as a whole.
Regional integration and green finance
The third requirement is deeper regional integration. Bigger, more connected markets can reduce the penalty investors assign to individual countries. Latin America still operates too often as a collection of fragmented markets, each carrying its own risk premium and regulatory barriers. Closer trade ties and more compatible rules would make the region more attractive as a platform for investment.
Financial integration could reinforce that shift. More liquid regional capital markets, broader access to institutional investors and a stronger role for the Inter-American Development Bank would all help reduce financing costs. These steps would not eliminate country risk, but they would make it less punitive.
Green finance also deserves a central place in this conversation, not as a separate theme but as part of the region’s effort to lower financing costs. As this series noted in discussing renewable energy in Brazil and Mexico, green and sustainability-linked bond markets have expanded quickly in Latin America. Latin American and Caribbean issuers raised $31 billion in sustainable bonds in 2023, up 52% from 2022. Chile has led at the sovereign level since 2019, and Brazil followed with a $2 billion sovereign sustainable bond in late 2023.
These instruments matter because they can widen the investor base and attract long-term capital on more favorable terms. That does not solve the region’s deeper structural problems, but it can help ease financing constraints in sectors where Latin America has real potential, especially energy and infrastructure.
The path forward
The broader point is simple. Lowering the cost of capital in Latin America is not an abstract aspiration. It is a practical goal that depends on policy consistency over time. Every percentage point shaved off WACC creates more room for productive investment and improves the region’s chances of narrowing the gap with more advanced economies.
For policymakers, the message should be clear. Institutional stability and macroeconomic discipline are not side issues. They are central to growth. Latin America does not simply need to attract capital. It needs to hold on to it and put it to work in ways that expand opportunity.
If the region acts decisively, the cost of capital can stop functioning as a brake on progress and begin to serve as a lever for stronger growth and broader prosperity.
César Addario Soljancic is an economist specializing in public finance, with decades of experience advising governments and institutions across Latin America and the Caribbean. Over his career, he has led 69 capital-market issuances across 13 countries, totaling nearly $49 billion. The views expressed are solely those of the author.
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