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Macroeconomics
Over the past three years, Latin America has undergone an economic policy shift towards fiscal discipline, a smaller and more efficient state, and freer markets. This shift is making the region more attractive to international investors seeking alternatives to heavily indebted advanced economies and looking to diversify their portfolios away from the AI boom. Rarely have the push and pull factors been so favourable for the region. Capital inflows could support growth and give reforms political momentum, at least until the pendulum swings back to the left. Following the surprising victory of 81-year-old Luiz Inácio Lula da Silva in Brazil's presidential election, it remains unclear whether Brazil will join this shift and benefit from it.
Improving Pull Factors
A region becomes more attractive to investors when its macroeconomic conditions improve or when the alternatives become less appealing. The literature distinguishes between pull factors (domestic conditions) and push factors (international conditions) as drivers of growth.
Credible fiscal consolidation is an important pull factor. When a government faces financial difficulties, it may resort to printing money to finance its spending. This depreciates the currency and worsens investment conditions. Sound public finances, by contrast, strengthen private-sector activity. The more stable the macroeconomic environment, the more attractive the region becomes for both domestic and foreign investment.
Low international financing costs during the 2010s made it easier for many Latin American governments to finance higher public spending through borrowing. Across Latin America, public debt rose from just under 50 percent of gross domestic product (GDP) in 2011 to 74.1 percent in 2025 (Figure 1). In Brazil, the debt ratio increased from 60 to 93.3 percent of GDP. In Argentina, it rose from 40 percent to more than 80 percent in 2022. In 2023, it jumped abruptly to 106 percent or even more than 150 percent, depending on the measure used. Following Javier Milei's electoral victory and his decisive move to balance the government budget, Argentina's public debt ratio fell to around 80 percent in 2025. As the reforms have been accompanied by stronger growth, Argentina has since become a model for other conservative politicians in Latin America seeking to consolidate public finances.
Overall, markets welcomed the political shifts. In Colombia, the reaction was immediately visible in the exchange rate. Since 2024, both the Colombian peso and the Brazilian real had already been appreciating against the US dollar, driven by interest rate cuts by the Federal Reserve (Figure 2). In May 2026, when conservative candidate Abelardo de la Espriella unexpectedly won Colombia's presidential election, the Colombian peso appreciated even more strongly, particularly against the Brazilian real. The peso's sharp appreciation immediately after the election suggests that markets welcomed the prospect of fiscal stabilisation. In Brazil, the real initially strengthened following conservative presidential candidate Flávio Bolsonaro's unexpectedly strong performance in the first round of voting in early October. However, forward markets point to a sharp depreciation in response to the election of left-wing candidate Luiz Inácio Lula da Silva.
The Role of Push Factors
Growing concerns about public debt in advanced economies could provide an additional boost to Latin America. Many advanced economies face high tax burdens, rising public debt, and delayed reforms, leaving their growth prospects weak. Recently, government bond yields in highly indebted countries such as Japan and France have risen sharply. Higher yields in advanced economies can, of course, attract capital away from emerging markets. But when rising yields reflect growing fiscal risks and inflationary pressures, countries pursuing credible fiscal consolidation become relatively more attractive.
Despite the decline in recent days, ten-year government bond yields in several advanced economies remain between 0.7 and 1.5 percentage points above their levels at the beginning of the year (Figure 3). Investors are thus demanding higher risk premiums to hold these government bonds.
By contrast, Brazilian government bond yields were 0.87 percentage points below their level at the beginning of the year on the Friday before the presidential election. This advantage is likely to disappear for the time being following the election result. Colombia illustrates how quickly expectations can change. Between the presidential election in May and July, Colombian government bond yields fell by almost three percentage points. When the new government disappointed investors with its fiscal consolidation plans, yields rose again, although they remain below their pre-election level. Against a backdrop of growing debt problems, particularly in France and potentially in the United States, expectations of fiscal consolidation in an increasing number of Latin American countries could make the region more attractive to international investors.
Latin America may also appeal to investors seeking diversification. Asian emerging markets are heavily exposed to the AI boom through semiconductor production and AI infrastructure, particularly in Taiwan and South Korea. Latin America, by contrast, plays almost no role in these industries. As commodity exporters, many Latin American countries instead benefit from geopolitical tensions that are not directly related to the AI boom.
Information technology accounts for 52.5 percent of the MSCI Asia Index, while the sector is absent from the MSCI Latin America Index. Materials and energy, by contrast, account for a combined 30.8 percent of the Latin American index, compared with only 5.6 percent in Asia. Following the outbreak of the war in Ukraine, Latin American equities rose sharply while Asian equities declined. With the Federal Reserve’s interest rate cuts beginning in autumn 2024 and the AI euphoria since 2025, both Asian and Latin American equity markets rallied. The recent setback in the AI boom has hit the Asian index hard, while Latin American equities have benefited from the surge in oil prices following the outbreak of the Iran war (Figure 4).
Tailwinds Until the Pendulum Swings Back
If Latin American governments continue with their announced fiscal consolidation efforts, capital inflows into the region are likely to persist, not least because of the still unstable macroeconomic environment in advanced economies. These inflows bring both opportunities and risks.
Capital inflows can facilitate fiscal consolidation and help bring down inflation, thereby supporting growth. International capital inflows tend to strengthen local currencies, making imported goods cheaper. If governments maintain their consolidation efforts, inflationary pressures ease, giving central banks room to cut interest rates. This loosens financing conditions and encourages investment. How much real growth this generates depends on the extent to which capital inflows finance productive investment. Low inflation and economic growth also give governments political momentum ahead of the next elections.
The question, however, is whether all segments of society will benefit from stronger growth. Informal employment remains widespread in many Latin American countries. In 2025, the share of informal employment ranged from 22.3 percent in Uruguay to as much as 82.3 percent in Bolivia. In Brazil, it stood at 35.8 percent (ILO 2025). Weak or insufficiently protected property rights make it difficult to access the formal financial sector. As a result, large parts of the population have only limited opportunities to benefit from improved financing conditions.
If capital inflows primarily benefit established firms while large segments of the population continue to have only limited access to finance, a political risk emerges. Even if living standards improve, the perception that the rules of the game are not the same for everyone may persist. Support for governments could then fade, while demands for greater redistribution and state intervention could return. Without institutional reforms that allow broader segments of society to participate in the formal market economy, the political shift may therefore prove temporary (Duarte 2026).
Conclusion
The recent policy shift in several Latin American countries, including Argentina, Bolivia, Honduras, Chile, Peru, and Colombia, towards fiscal stability, a smaller state, and freer markets is making the region more attractive to international investors seeking alternatives to heavily indebted advanced economies and the AI boom. Whether Brazil will join this shift following Lula’s re-election remains uncertain.
This could usher in a period of strong growth across the region, provided inflation remains low and people perceive an improvement in their living standards. So far, however, there has been little sign of reforms aimed at curbing the privileges of small groups and giving more people access to the formal economy. As long as not everyone has equal access to a market-based economic order, macroeconomic stabilisation could once again lead to disappointment and cause the political pendulum to swing back to the left.
Short-Interview with Dr Pablo Duarte
Why might Latin America be on the verge of an economic boom?
Pablo Duarte: Several Latin American countries are increasingly focusing on sound public finances, a smaller state and a more market-oriented economy. This makes the region more attractive to international investors. At the same time, investors are looking for alternatives to highly indebted industrialised countries. New capital inflows could encourage investment and boost economic growth.
What role does public debt play in Latin America?
Duarte: High public debt can jeopardise economic stability and deter investors. In Latin America, the debt-to-GDP ratio rose from just under 50 per cent of gross domestic product in 2011 to 74.1 per cent in 2025. Argentina demonstrates that consistent fiscal consolidation can reduce the debt-to-GDP ratio and strengthen investor confidence.
Why is Latin America an alternative for investors to the AI boom?
Duarte: Latin America’s stock markets are heavily influenced by commodities and energy. Together, these two sectors account for 30.8 per cent of the MSCI Latin America Index. In Asia, by contrast, the IT sector dominates, accounting for 52.5 per cent. Latin America therefore offers investors an opportunity to reduce their dependence on the AI boom and to benefit from rising commodity prices.
What risks could jeopardise the economic upturn?
Duarte: A major risk is that broad sections of the population are barely benefiting from the growth. Many people work in the informal sector and have only limited access to credit. If established companies in particular benefit from capital inflows, discontent could grow. Without reforms, there is therefore a risk of a renewed political shift away from the market economy.
What data and academic sources underpin the analysis?
Duarte: The analysis draws on data from the International Monetary Fund, the International Labour Organisation and MSCI. It also includes time series from Macrobond, the US Treasury and the Colombian Central Bank. An academic study by Fernández-Arias from 1996 explains the significance of international and local factors for capital inflows.
References
Duarte, P. (2026). Lateinamerika und die Rückkehr zur fiskalischen Disziplin. Flossbach von Storch Research Institute, 23 July 2026.
Fernández-Arias, E. (1996). The new wave of private capital inflows: Push or pull? Journal of Development Economics, 48(2), 389–418. doi.org/10.1016/0304-3878(95)00041-0https://doi.org/10.1016/0304-3878(95)00041-0
International Labour Organization (ILO). (2025). Panorama Laboral 2025. ILO Regional Office for Latin America and the Caribbean. www.ilo.org/sites/default/files/2025-12/OIT-Informe-PANORAMA-LABORAL-2025.pdf
International Monetary Fund (IMF). (2024). Argentina: Eighth Review Under the Extended Arrangement Under the Extended Fund Facility. IMF Country Report No. 24/167.
About the author
Senior Research Analyst. PhD and studies in economics at the University of Leipzig, New York University and Universidad del Rosario (Colombia). Research interests include international macroeconomics and economic policy.
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