Jan. 12 (UPI) — Economic growth in Latin America is rarely constrained by a lack of ideas. Far more often, it is limited by the high price of the capital required to finance them.
In a region where creativity and volatility often go hand in hand, the cost of capital reflects the price companies must pay to access resources for operations and expansion. It represents the returns demanded by investors and lenders as compensation for the risks of doing business across the region.
This article begins a series examining why capital costs in Latin America remain structurally higher than elsewhere and what that means for growth and competitiveness.
Understanding capital costs requires grasping two key components. The cost of equity reflects what shareholders expect to earn, while the cost of debt captures the interest rates and risk spreads demanded by creditors. Together, these form the Weighted Average Cost of Capital, or WACC, the benchmark used to judge whether investment projects are economically viable.
The timing of this analysis is critical. With regional growth projected at between 2.3% and 2.5% in 2026, according to the U.N. Economic Commission for Latin America and the Caribbean, policymakers must confront the factors holding the region back. Political volatility and inflationary pressures persist, while reliance on commodity exports leaves many economies exposed to external shocks that raise financing costs and deter long-term investment.
The primary driver of high capital costs is the country risk premium, which reflects investors’ perception of sovereign risk. Data compiled by finance professor Aswath Damodaran in January 2026 show Latin America carrying an average country risk premium of roughly 3.5%, though the figure varies widely by country.
This premium is added to base rates in mature markets, pushing the cost of equity, calculated using the Capital Asset Pricing Model, into the 10% to 15% range across much of the region. In developed economies, equity costs typically fall between 6% and 8%.
The contrast becomes clear when examined country by country. Mexico, with a risk premium near 1.5%, benefits from close integration with North America and relative macroeconomic stability. A typical Mexican firm with a beta of 1.0 faces an equity cost of roughly 9% to 10%. Combined with moderate debt costs and a balanced capital structure, overall WACC often lands near 8.5%, low enough to support the advanced manufacturing and nearshoring-driven growth that has made Mexico an investment magnet.
Argentina sits at the opposite extreme. Its country risk premium exceeds 12%, reflecting repeated sovereign defaults and chronic policy uncertainty. Equity costs there can reach 18% to 20%, and corporate WACC often exceeds 15%. Under such conditions, companies abandon even promising projects, relying on short-term financing or internal funds rather than long-term investment.
These differences are not accidental. They reflect variations in institutional strength and policy credibility, as well as exposure to global disruption. Chile and Peru maintain relatively low risk premiums and WACC levels between 7% and 9%, supporting investment in sustainable mining and renewable energy. Brazil, with a risk premium around 2.5%, has improved its position through fiscal reforms, though reliance on commodities continues to limit diversification.
The cost of capital matters because it determines which ideas become real investment. When WACC is high, companies shelve projects that would proceed easily in developed markets, including industrial plants and digital infrastructure. The result is slower growth, weaker competitiveness and widening development gaps across the region.
This outcome is not inevitable. Lowering the cost of capital is possible through sustained structural reform. Fiscal discipline and monetary credibility reduce inflation risk. Strong property rights and transparent courts lower business uncertainty. Trade openness reduces dependence on volatile commodity cycles. Anti-corruption efforts cut the real cost of operations. Taken together, these measures can reduce country risk premiums by one to two percentage points, unlocking billions of dollars in investment.
Future articles in this series will explore these dynamics in greater depth, examining how WACC varies across countries and how it behaves during crises. Specific sectors will be analyzed through examples from Mexico, Brazil, Colombia, Peru, Paraguay and Chile.
For now, the core insight is straightforward: capital is expensive in Latin America because risk is perceived as high. Addressing that reality requires patience and consistency. Understanding why capital costs what it does is the first step toward making it more affordable.
César Addario Soljancic is an economist and expert in public finance, economic development and infrastructure. He has advised governments and institutions across Latin America, including El Salvador, Guatemala, Honduras, Bolivia, Ecuador, Nicaragua and Venezuela, as well as in the Caribbean, on fiscal policy, financing strategies and capital markets. His experience includes multilateral banking and regional macroeconomic analysis. Over the course of his career, he has led 69 capital market issuances in 13 Latin American countries, totaling nearly $49 billion.
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