How stable institutions and low borrowing costs are making finance work for development in Latin America
Uruguay’s cost of capital is not just a financial statistic. It reflects institutional choices over time: keeping inflation in check, maintaining political stability, honoring contracts and investing in modernization. File Photo by Raul Martinez/EPA
Part of a series on capital flows and political risk in Latin America
Every loan a bank makes, whether to a farmer, a small business or a family buying a home, starts with a basic question: What does it cost the bank to raise money? That cost influences the loan’s interest rate, the bank’s willingness to lend, and the amount of financing that reaches the real economy.
In finance, the standard measure is WACC, the weighted average cost of capital — the blended cost a bank pays for funding, combining relatively cheap sources (deposits and debt) with the higher returns expected by equity investors. Lower WACC leaves more room to lend at competitive rates; higher WACC usually means more expensive, scarcer credit.
Across Latin America, WACC varies widely, helping explain why credit is affordable in some countries and costly in others. Uruguay, with stable institutions and a long record of sound economic management, sits at the favorable end of that spectrum.
Why country risk matters for your loan rate
The foundation of any country’s borrowing costs is country risk: the extra return investors demand to compensate for the chance that things go wrong. Countries with credible governance and predictable rules pay less; those with a history of instability pay more.
According to data compiled by NYU professor Aswath Damodaran (updated January 2026), Uruguay’s country risk premium stands at 1.36%, consistent with its Baa1 investment-grade rating from Moody’s and among the lowest in Latin America. Some more conservative estimates, adjusting for historical volatility, place it slightly higher, around 1.5%. Either way, the number is notably low for the region. Market-based measures of sovereign risk in early 2026 also put Uruguay near the bottom of the Latin American range.
This matters because country risk filters into everything downstream: the return equity investors demand to put money into a bank, how cheaply a bank can borrow, and ultimately what rate it charges the farmer or small business owner at the end of the chain.
Uruguay’s state bank as a case study
Banco de la República Oriental del Uruguay (BROU) is the country’s state-owned bank and a leading institution in the system. It does not publish an official WACC figure, but the author’s calculations, using standard methodology and publicly available data on BROU’s funding structure, yield a working estimate based on its stable, relatively low-cost deposit base, modest risk exposure, and Uruguay’s low country risk premium.
That analysis suggests a WACC around 7% — an estimate, not an official figure, and one that will vary with assumptions. In the Latin American context, 7% is considered competitive, which helps explain why Uruguay tends to offer cheaper credit than its peers with higher funding costs.
A bank that can fund itself more cheaply has more room to lend widely, price competitively, and absorb occasional losses without taking excessive risk.
Why keeping inflation low matters
One of the most important ingredients in Uruguay’s cost of capital is its inflation record. Uruguay ended 2025 with annual inflation of about 3.65%, and early 2026 readings were around 3.46%, below the Central Bank’s 4.5% target.
When inflation is low and predictable, lenders do not need to charge high rates just to protect themselves from the erosion of money’s value. Risk premiums shrink, longer-term contracts become easier to write, and credit becomes more affordable, especially for smaller borrowers who feel rate swings most sharply.
A credible inflation record is not just “good management.” It lowers borrowing costs across the economy.
How going digital cuts the cost of banking
Another factor is digitalization. Uruguay is widely recognized as a regional leader in electronic payments and digital banking. As customers shift to online channels, banks can often spend less on branches and manual processing.
While lower operating costs do not reduce WACC directly, they strengthen profitability and investor confidence over time, both of which support lower funding costs. In the nearer term, efficiency gains free up resources that can be redeployed as credit. BROU’s digital push, anchored by its eBROU platform, is part of this story: its efficiency ratio — which measure how much a bank spends for each dollar of revenue it generates — ranged from 40% to 41% in 2025 — strong by regional standards — reflecting a bank that is doing more with less and passing the benefit on through broader credit access.
What the numbers say about BROU’s health
BROU’s financial results reinforce the broader picture. According to the institution’s published reports and filings with the Banco Central del Uruguay, the bank ended 2025 in solid shape: non-performing loans of about 2.4% to 2.5% of its portfolio, return on assets around 3.5% to 3.7%, return on equity above 30% (reaching the high 30s in recent periods), and Tier 1 capital comfortably above regulatory minimums.
These figures point to a bank that is profitable without being reckless, well-capitalized without being idle, and expanding credit while maintaining quality.
With a funding cost estimated near 7%, BROU has room to keep lending to the sectors that support Uruguayan growth — agriculture, exports, and small and medium-sized businesses — without sacrificing financial strength.
The lesson for Latin America
Uruguay’s cost of capital is not just a financial statistic. It reflects institutional choices over time: keeping inflation in check, maintaining political stability, honoring contracts and investing in modernization. Those choices compound: they lower the risk premium investors demand, which lowers the cost of funding, which in turn lowers lending rates and expands access to credit.
For comparison, cost-of-capital estimates for other investment-grade countries in the region run meaningfully higher: using the same Damodaran methodology, Colombia’s country risk premium stands near 3.6% and Peru’s near 2.3%, both roughly double or triple Uruguay’s, reflecting greater currency volatility, less stable inflation histories, and higher perceived political risk. The gap shows up in the price and availability of credit for ordinary borrowers.
In Uruguay, the result is a banking system that works as an ally of development rather than a constraint on it. The broader point for the region is straightforward: cheap credit is not a gift. It is earned through credibility, stability, and the patient work of building institutions that hold.
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.
