Part of a series on capital flows and political risk in Latin America
Panama and Paraguay now hold investment-grade status, yet each still faces the challenge of financing major infrastructure at a cost that keeps projects attractive over the long term. File Photo by Bienvenido Velasco/EPA
Infrastructure is the skeleton of any economy that hopes to grow sustainably. Roads, ports, dams and canals all require long-term capital. They require a great deal of it and, above all, capital at a reasonable cost.
That is where much of Latin America runs into trouble.
Capital in the region is rarely cheap. The weighted average cost of capital, or WACC, often rises above 8% to 10%, and that is enough to undermine projects that may look viable on paper. The result is a familiar regional paradox: countries with clear strategic advantages still struggle to turn potential into execution.
Two nearby cases help illustrate the point: Panama and Paraguay. Both now hold investment-grade status, yet each still faces the challenge of financing major infrastructure at a cost that keeps projects attractive over the long term.
Panama has benefited from relatively low country risk
Its sovereign profile, along with the stabilizing role of the Panama Canal, has helped keep financing conditions more favorable than in much of the region. For large projects tied to the Canal’s institutional strength, the effective WACC has remained close to 8%.
One recent example is the Panama Canal Authority’s Interoceanic Energy Corridor, a proposed LPG pipeline connecting Atlantic and Pacific terminals, with a projected cost of $4-$8 billion. It has drawn preliminary interest from major energy firms such as ExxonMobil and Shell. That kind of capital formation is only possible because Panama’s risk profile keeps financing costs low enough for projects of that scale to pencil out. That is hardly as cheap as capital in advanced economies, but it is low enough to support robust returns and allow the Canal Authority and related projects to attract debt and equity without being overwhelmed by financing costs.
Paraguay has also made important progress
Its move into investment-grade territory marked a major step forward and reflected years of macroeconomic discipline. Yet even with that upgrade, the cost of capital for large infrastructure projects remains a constraint.
For hydroelectric expansion, transmission upgrades or additional generation capacity, the WACC can still move toward 10% or higher. That matters. Paraguay’s access to abundant hydroelectric power gives it one of the strongest structural advantages in South America, but financing new infrastructure at elevated rates can weaken project returns and delay investment decisions.
Cheap energy alone is not enough
A country may have extraordinary natural assets, but if the capital required to connect, distribute or expand those assets remains too expensive, the advantage is never fully converted into growth.
This is where the region’s broader infrastructure challenge comes into focus. The Inter-American Development Bank estimates the infrastructure investment gap in Latin America and the Caribbean at roughly $150 billion per year, a shortfall equivalent to about 2.5% of regional GDP. The problem is not only that more money is needed. It is that the price of money is too high. Once financing costs rise beyond a certain point, many projects become marginal.
That helps explain why public-private partnerships remain such an important instrument. PPPs do not magically make private capital cheap. In many cases, private financing costs more than sovereign borrowing. What PPPs can do, when designed well, is distribute risk more intelligently.
The state can better absorb political or regulatory risks than a private developer, while the private sector can take the lead on construction and operations. When that balance is credible, the project’s total risk premium can decline, making financing more manageable.
Panama has used models associated with the Canal’s institutional strength to encourage infrastructure investment in other sectors, including ports and energy. Paraguay has also turned to PPP-type structures in areas such as transmission and distribution. The lesson in both cases is not ideological.
It is practical. Investors respond when the framework is stable and risk is allocated with discipline.
A second frontier: The role of sovereign wealth funds
These investors are especially relevant for infrastructure because they have a long-term outlook and the patience to wait for returns over decades rather than quarters.
There are encouraging signs that some of this capital is beginning to flow into the region. Singapore’s GIC, one of the world’s largest sovereign investors, has explicitly identified Latin American infrastructure as an overweight position, allocating roughly 12% of its global infrastructure portfolio to the region and focusing on energy and transport infrastructure. Its investments in Brazil’s electricity sector are among its portfolio assets.
More broadly, sovereign wealth funds worldwide have sharply pivoted toward hard assets. In 2024, infrastructure and real estate together accounted for 61% of publicly disclosed sovereign wealth fund direct investments, up from 40% the previous year. Latin America has not captured as much of that capital as it could, but the direction of travel is changing.
To attract more of it, countries need more than investment-grade headlines. They need governance that inspires confidence and projects that are structured with sufficient transparency to attract large pools of patient capital. Panama has an advantage because of its location and the Canal’s global importance. Paraguay has a different advantage: clean, abundant energy and a gradually improving credit profile.
Each country offers a distinct case for why lower country risk and better project design can make the difference between infrastructure that advances and infrastructure that remains only a promise.
The real lesson from Panama and Paraguay
In the end, this is not just about interest rates. It is about understanding infrastructure for what it really is: not consumption, but investment with multiplier effects across the economy. Roads lower logistics costs. Transmission lines unlock energy assets. Ports expand trade capacity. Water systems improve productivity and public health. When the cost of capital falls to competitive levels, projects that once seemed doubtful begin to make economic sense.
For Latin America, the infrastructure debate cannot stop at identifying needs. It must also confront the financial architecture that determines whether those needs can actually be met. If countries can keep lowering risk and strengthening project design, they can begin to close gaps that have remained open for decades. If not, the region will continue to speak the language of potential while others move ahead.
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.
