Companies translate regional risks in Latin America into investment decisions using a tool known as the weighted average cost of capital, or WACC. File Photo by John Angelillo/UPI | License Photo
Part 4 of a series examining structural barriers to growth and competitiveness in Latin America.
Imagine a company considering a $500 million lithium project in northern Chile. The geology is promising. Global demand for batteries is rising. The technology exists. Yet the project may still not proceed.
Why? Because the expected return must exceed the company’s cost of capital, the price it pays to use money from investors and lenders. If the project cannot clear that hurdle, it will be postponed or cancelled, no matter how attractive it appears on paper.
Earlier articles in this series explained why capital is expensive in Latin America. This installment shows how companies translate those regional risks into concrete investment decisions. The key tool they use is the weighted average cost of capital, or WACC. In practice, it is the benchmark firms use to decide whether an investment moves forward.
In simple terms, WACC represents the minimum return a project must generate to create value. It combines two sources of financing: equity from shareholders and debt from lenders. Because interest payments on debt are partly tax-deductible, borrowing is slightly cheaper after taxes than the headline interest rate suggests.
The most difficult component to estimate is the cost of equity. Firms typically use a model that starts with a global “risk-free” rate, such as that of U.S. Treasury bonds, then adds a general stock market risk premium and a country risk premium reflecting the additional uncertainty of operating in a particular nation.
Another factor is “beta,” a measure of a sector’s volatility relative to the overall market. Industries tied to commodity prices or rapid technological change tend to swing more sharply, so investors demand higher returns to compensate.
When these elements are combined, the result is the company’s WACC — effectively its investment hurdle rate. The formula itself is straightforward, but the economic meaning is what matters: WACC translates macroeconomic risk into project-level decisions.
Consider Brazil. With moderate country risk and a mining sector that tracks global commodity cycles, firms often face a WACC of approximately 10%. That means a new iron ore project must promise returns above that level to proceed. If commodity prices fall or political risk rises, the effective hurdle increases, and projects are delayed. Companies such as Vale use similar thresholds when assessing new deposits.
Chile presents a different environment. Lower country risk and more stable policy frameworks help keep WACC closer to 7% in sectors such as renewable energy. This partly explains the surge of investment in solar and wind projects. Lower capital costs make long-term infrastructure more financially viable.
At the opposite extreme lies Venezuela. Extremely high country risk pushes required returns into a territory that few projects can meet. With WACC often approaching or exceeding 18-20%, even oil investments struggle to proceed. Under such conditions, capital formation stalls despite vast natural resources.
Sector characteristics matter as well. Mining and agriculture tend to be more volatile, raising required returns. Technology and fintech projects in emerging markets also face higher perceived risk. Analysts often calculate WACC for each project separately rather than applying a single company-wide figure.
WACC is therefore not an abstract financial statistic. It determines whether factories are built and energy projects move forward — or whether they are quietly shelved. Companies that calculate it realistically attract capital and grow. Those that ignore risk destroy value.
The broader lesson is clear. Global capital flows where risk is properly priced. Reforms that reduce public debt, stabilize inflation and strengthen legal protections lower country risk premiums and reduce WACC across the economy. As the cost of capital falls, more projects become viable, while investment rises and growth accelerates.
The views and opinions expressed in this commentary are solely those of the author.
