The cost of equity — the return demanded by shareholders to compensate for the risk of investing in stocks — has become one of the most consequential variables in financial decision-making across Latin America.
Estimating this cost correctly in a region marked by volatile equity markets, political instability, commodity dependence and external shocks is no longer an academic exercise. It is a strategic necessity for companies, investors and governments seeking to attract capital, finance long-term projects and remain competitive in a global economy.
In 2026, with global interest rates largely stabilized but country risk premiums still weighing heavily on emerging markets, the average cost of equity in Latin America ranges between 10% and 15%. This contrasts sharply with the 6% to 8% typical of developed economies. The gap acts as an invisible barrier to growth, raising financing costs, delaying investment in infrastructure, energy transition and technology, and limiting firms’ ability to create sustainable value.
How the cost of equity Is estimated
In simple terms, the cost of equity answers a basic question: how much return must an investment offer to be worth the uncertainty involved?
To estimate this, analysts typically rely on the Capital Asset Pricing Model, or CAPM. While the formula may appear technical, its logic is intuitive. It builds the required return step by step, adding layers of risk.
The starting point is the risk-free rate, usually represented by the yield on long-term U.S. Treasury bonds. This reflects the return investors can earn with minimal risk. In early January, the 10-year U.S. Treasury yield hovered near 4.18% to 4.19%, reflecting a more stable interest-rate environment after the Federal Reserve’s tightening cycle.
Next comes the equity risk premium, which compensates investors for choosing stocks over risk-free assets. In mature markets, this premium is currently estimated at approximately 4.2% to 4.3%, based on implied figures published by NYU professor Aswath Damodaran following recent adjustments to U.S. credit risk and market valuations.
Two additional adjustments are especially important in emerging markets.
The first is beta, which measures how sensitive a company or sector is to movements in the overall stock market. A beta of 1 means the investment tends to move in line with the market. A beta above 1 indicates greater volatility, while a beta below 1 suggests more stability. Oil producers, for example, typically have higher betas than utilities because their earnings fluctuate more sharply with global prices.
The second is the country risk premium, which reflects risks that affect all investments in a given country, regardless of the company involved. These include political uncertainty, institutional weakness, currency volatility and the possibility of sovereign default.
In simple terms, beta captures business risk, while the country risk premium captures location risk. Both matter, and they are additive.
Expressed succinctly, the model can be summarized as:
Cost of Equity = Risk-Free Rate + (Market Risk × Beta) + Country Risk Premium
In developed economies, the country risk premium is minimal. In much of Latin America, it remains substantial, which is why the overall cost of equity is significantly higher than in advanced markets.
Why country risk matters in Latin America
In his Jan. 5 update, Damodaran estimates the average country risk premium for Latin America at roughly 3.5%, with wide variation across countries.
Brazil’s country risk premium stands near 3.24%, Colombia’s at 2.85%, Mexico’s at 2.46%, Peru’s at 2.07%, and Chile’s at just 1.10%. These values are derived from sovereign credit ratings, default spreads adjusted for equity volatility, and, where available, credit default swap data. The result is a cost of equity that sharply penalizes countries perceived as riskier, producing deep asymmetries within the region.
Brazil offers a clear illustration. With a country risk premium of 3.24%, a mature-market equity premium of about 4.2%, and a global risk-free rate near 4.18%, the base cost of equity for a company with a beta of 1 is roughly 11.6%. For Petrobras, whose historical beta is closer to 1.2 due to commodity exposure, regulatory risk, and leverage, the cost rises to approximately 13% to 14%.
This elevated hurdle rate directly affects strategic decisions, from offshore exploration to low-carbon investments and dividend policy. In an environment of volatile oil prices and fiscal uncertainty, Petrobras must prioritize projects with internal rates of return well above 15%, slowing diversification and increasing exposure to commodity cycles.
Colombia faces a similar constraint. With a country risk premium near 2.85%, or higher when credit default swap spreads are used, the base cost of equity approaches 11% for a beta of 1. For Ecopetrol, whose beta is estimated between 1.3 and 1.5, the cost rises to 13% to 15%, making it harder to justify investments in renewables, hydrogen, and carbon capture.
Chile, by contrast, demonstrates the benefits of institutional stability. With a country risk premium of just 1.10%, companies such as Codelco and Enel Chile face equity costs closer to 7% to 8.5%. This enables lower-cost financing for copper mining, critical to global decarbonization efforts, and positions Chile as a regional hub for critical minerals, attracting substantial foreign direct investment.
Mexico occupies an intermediate position. Nearshoring and deep integration with the United States help offset risk, but concerns over public debt, security and policy volatility keep equity costs near 9% to 11%. Peru shows resilience in mining but remains vulnerable to institutional instability.
These differences are far from theoretical. A higher country risk premium translates directly into a higher hurdle rate, reducing the number of viable investment projects. With Latin America’s growth projected at just over 2% in 2026, elevated equity costs help explain why private investment continues to lag behind emerging Asia.
Reforms that strengthen institutions, reduce public debt, stabilize currencies, combat corruption and deepen trade integration could lower country risk premiums by one to two percentage points, unlocking billions of dollars in investment. As Damodaran notes, these premiums are not fixed; they respond to perceived improvements, as in Chile, or deterioration, as in Argentina, where equity financing has become nearly prohibitive.
For global investors, high equity costs in Latin America present both opportunity and risk. Undervalued assets can offer attractive returns, but exposure to sudden shocks remains high. The conclusion is straightforward: lowering the cost of equity requires lowering perceived country risk.
In 2026, the CRP-adjusted CAPM offers a clear diagnosis: elevated volatility, persistent premiums, and a cost of capital that continues to restrain development. Closing the gap with developed markets will depend on how effectively the region reduces the embedded risks that still weigh so heavily on equity investment.
