The contrasting experiences of Argentina and Bolivia illustrate how inflation reshapes the real cost of capital in ways that are often underestimated. File Photo by John Angelillo/UPI | License Photo
In earlier installments of this series on international project finance in Latin America, we examined how sovereign risk and currency volatility influence the cost of capital for long-term investments. This article turns to inflation, an equally decisive variable that operates quietly but relentlessly.
Unlike policy shocks or market swings, inflation functions as an invisible tax. It erodes the real value of money over time, raises financing costs, distorts investment decisions, and ultimately discourages productive projects. The contrasting experiences of Argentina and Bolivia illustrate how inflation reshapes the real cost of capital in ways that are often underestimated.
How inflation raises the cost of capital
Consider an investor evaluating a renewable energy project. The cost of capital — the minimum return required to justify the investment — is not an abstract concept. It is commonly estimated using the weighted average cost of capital (WACC), which combines the cost of debt and equity. For equity, investors typically rely on the Capital Asset Pricing Model (CAPM):
Cost of equity = risk-free rate + beta × market risk premium + country and inflation adjustments
Beta measures how volatile an investment is relative to the broader market. A beta of one implies average volatility; higher values signal greater risk. When inflation rises, each component of this equation increases because future cash flows lose real purchasing power.
Take a hypothetical but realistic example: a $100 million wind farm project in Argentina. Assume a global risk-free rate of 4%, a sector beta of 1.3 reflecting regulatory and macroeconomic volatility, a global market risk premium of 6% and a country risk premium of 5% based on EMBI data. In the absence of inflation, the cost of equity would be approximately 16.8%.
With expected inflation of 20-22 percent per year, nominal financing costs rise sharply. Local interest rates incorporate inflation expectations, pushing the nominal WACC toward 35-40 percent. Under those conditions, annual cash flows of $15 million over ten years, discounted at such a high rate, may produce a negative net present value.
The project becomes financially unviable. If inflation were closer to 3 percent, as in more stable economies, the WACC would fall to roughly 12-15 percent, restoring the project’s attractiveness. Inflation does more than inflate numbers; it suppresses investment, employment, and growth.
Argentina: Narrow gains from restored credibility
Across Latin America, projected 2026 inflation averages approximately 3%, reflecting stronger monetary frameworks and easing external pressures. Important outliers remain.
Argentina is undergoing disinflation, which began in 2025. The central bank’s market expectations survey projects monthly inflation of approximately 2% in early 2026, easing to 1.5% by midyear, implying an annual inflation rate of 20-22%. Private-sector estimates remain higher under pessimistic scenarios, prompting companies to continue planning at high nominal levels to preserve real value.
Even so, Argentina’s risk profile has improved. The country risk premium has fallen to roughly 490-500 basis points, according to early-2026 data from JPMorgan Chase, its lowest level in eight years. Nominal WACC levels for large corporations now range from 15 to 18%, though CAPM-based equity costs still embed inflation risk, with sector betas typically between 1.2 and 1.5 in energy and infrastructure.
This improvement has opened a narrow but meaningful financing window. Large firms such as Techint, with substantial exposure to infrastructure investment, are beginning to leverage this position.
Projects with dollar-denominated revenues or short payback periods of five years or less are becoming more viable. Currency and fiscal uncertainty still favor structures supported by hedging or external guarantees, but investments that were unfinanceable in 2024 are again attracting interest. The shift reflects growing institutional credibility, particularly the central bank’s commitment to price stability.
Bolivia: Inflation and institutional constraint
Bolivia presents a more troubling contrast. After ending 2025 with inflation above 20%, the government projects inflation to moderate to 12-17% in 2026. International institutions, including the International Monetary Fund, and independent analysts remain cautious, estimating inflation at 15-20% or higher, driven by fuel subsidies, foreign exchange shortages, and declining export revenues.
The core challenge is institutional. Bolivia’s central bank lacks the autonomy Argentina has pursued, limiting its ability to anchor inflation expectations credibly.
Without a monetary authority capable of resisting political pressure to finance deficits or maintain subsidies, investors demand higher risk premiums to compensate for policy uncertainty. These premiums translate directly into higher financing costs.
Bolivia’s dependence on natural gas exports, with YPFB as a central actor, further heightens vulnerability to commodity price swings and hard-currency constraints. These structural weaknesses are reflected in WACC calculations. For energy projects, WACC levels often exceed 10-12%, with local debt further burdened by liquidity premiums and rising sovereign risk.
Relocating the hypothetical wind project to Bolivia, assuming 15% inflation, would raise the nominal WACC to 25-30%. Discounted cash flows would yield an even lower net present value, likely leading to project cancellation. More broadly, chronic inflation constrains foreign exchange generation and long-term growth, reinforcing a vicious cycle of fiscal pressure and monetary instability.
Credibility as the foundation of investment
According to the Economic Commission for Latin America and the Caribbean, sustained anti-inflation policies, including clear targets, fiscal-monetary coordination and independent central banks, could reduce regional WACC levels by two to three percentage points. In capital-intensive sectors such as energy and infrastructure, that difference often determines whether projects proceed or fail.
The mechanism is straightforward. Institutional credibility lowers inflation, reduces interest-rate volatility, and compresses risk premiums. When investors trust that a central bank will defend price stability, they demand lower real returns.
Where independence is weak or absent, investors apply a credibility discount, requiring additional compensation for the risk that policy discipline will erode.
Argentina has made measurable progress along this path, with disinflation slowly restoring confidence. Bolivia, by contrast, faces urgent reform needs if it is to avoid entrenching double-digit inflation as the norm. Central bank autonomy is not a luxury; it is a prerequisite for accessing international capital markets on reasonable terms.
For project-finance investors across Latin America, the lesson is clear. Inflation remains a critical barrier to growth in parts of the region, even as regional averages stabilize. Projects in high-inflation environments require hedging, hard-currency exposure, or partnerships capable of absorbing currency risk. Where institutional credibility is weak, capital remains expensive and development delayed — constraints that no amount of engineering can overcome.
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.
