The cost of debt for Latin American governments and companies has become one of the region’s most powerful structural constraints, an expert explains. File Photo by John Angelillo/UPI | License Photo
Part 3 of a 12-part series examining structural barriers to growth and competitiveness in Latin America.
Productivity and innovation do not alone determine economic performance in Latin America. The price governments and companies pay to borrow matters just as much. That price — the cost of debt — has become one of the region’s most powerful structural constraints.
In emerging markets, borrowing costs reflect more than global interest rates. They incorporate country risk and inflation expectations, along with overall credit strength. When these factors weaken, financing becomes more expensive and investment activity slows, limiting growth. Understanding how inflation and credit ratings influence debt costs is therefore central to assessing Latin America’s economic outlook.
Debt costs are typically composed of three elements: the global risk-free rate (usually the 10-year U.S. Treasury yield, around 4%-4.5% in 2026), the country risk spread measured through EMBI or CDS indicators, and the premium tied to sovereign and corporate credit ratings from agencies such as Moody’s, S&P and Fitch.
In a global environment still marked by elevated interest rates and geopolitical volatility, Latin America faces average sovereign borrowing costs between 8% and 12%. Persistent inflation and high public debt remain the main drivers. In several countries, interest payments on dollar-denominated sovereign bonds now exceed 10%, according to the World Bank and the Inter-American Development Bank.
Regional debt-to-GDP ratios average close to 70% and remain under upward pressure. Higher debt increases perceived risk, widens spreads and raises refinancing costs. The World Bank warns that unsustainable debt crowds out private investment and diverts resources from social priorities, leaving economies more exposed in the post-pandemic high-rate environment.
Argentina shows how quickly conditions can change. After years of hyperinflation and recurring defaults, the Milei administration has overseen sharp disinflation. Inflation has fallen from triple digits in 2024 to projected averages of 16%-20% in 2026. Country risk spreads have declined to roughly 557-600 basis points, their lowest levels since 2018.
This improvement has allowed Argentina to return to international markets with coupons near 6.5%. Previously, when inflation hovered near 40% and country risk premiums were around 12%, sovereign yields exceeded 15%, pushing corporate borrowing costs after taxes toward 18%. Firms such as YPF struggled to refinance, limiting investment in Vaca Muerta and gas expansion. Sustained fiscal reform remains essential to prevent reversal.
Mexico presents a more stable case. Its investment-grade rating (BBB/Baa2) and low country risk premium of 1.5%-2% help keep borrowing costs near 6%. Despite carrying about $99 billion in debt, PEMEX benefits from strong sovereign backing, with roughly $13-14 billion in annual federal support for debt servicing. This support has enabled refinancing at competitive rates and continued upstream investment.
Peru is another example of relative strength. With a country risk premium near 1.36%-2% and an investment-grade rating, borrowing costs remain around 7%. This supports a mining sector that accounts for roughly 20% of GDP. Central bank independence and controlled inflation help maintain investor confidence, while a $64 billion mining investment pipeline continues to attract foreign capital.
Research from the World Bank and the IDB suggests that reducing public debt by 10%-20% of GDP could meaningfully narrow credit spreads. Empirical models indicate that every 100-basis-point drop in spreads may add .3%-.5% to annual growth by lowering capital costs. Fiscal consolidation and structural reform, therefore, remain central to competitiveness.
The regional pattern is consistent. Countries that stabilize inflation, maintain fiscal discipline and preserve credible credit ratings gain access to affordable financing and stronger investment flows. Those that allow risk premiums to rise face tighter financial conditions and weaker expansion.
As Latin America navigates political transitions and ongoing global uncertainty, debt management becomes more than just a fiscal issue. It transforms into a competitiveness strategy. Reducing risk perceptions, strengthening credit profiles, and maintaining macroeconomic stability are not only safeguards: they are essential for sustained growth.
César Addario Soljancic is an economist specializing in public finance, with decades of experience advising governments and institutions across Latin America, including El Salvador, Guatemala, Honduras, Bolivia, Ecuador, Nicaragua and Venezuela, as well as in the Caribbean. 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. The views and opinions expressed in this commentary are solely those of the author.
