Latin America can lower its cost of capital -- but only with reforms
Latin America's high financing costs are not fixed and can be improved with reforms, which would help lower the cost of capital and encourage development. By reducing the cost of capital, countries in the region can make more projects viable and attract foreign direct investment, leading to productivity gains and growth.
Latin America's high financing costs are a major obstacle to development. The weighted average cost of capital is often 2 to 5 percentage points above levels in developed economies. This is due to policy choices and structural weaknesses, such as sovereign risk and exchange-rate volatility. To lower the cost of capital, countries need to establish fiscal credibility, achieve economic diversification, and promote regional integration. Fiscal credibility can be achieved through sustainable fiscal policies, while economic diversification can be achieved by broadening the productive base and expanding into higher-value sectors. Regional integration can also help reduce the penalty investors assign to individual countries.
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