Nature, finance and the macroeconomy: evidence from Latin America

Elena Almeida synthesises findings from CETEx’s recent papers on Latin America and the Caribbean. Taken together, these carry a clear message that nature degradation is already generating measurable economic and financial adjustments across the region, warranting policy attention and offering lessons globally – a fitting message to amplify on this World Biodiversity Day.

At CETEx, a central part of our mission is to activate wider academic discourse and bring rigorous research into the rooms where economic and financial policy is made. One of the ways we do this is through open calls for research. We have now run two regionally focused calls in South-East Asia, and Latin America and the Caribbean, publishing several papers in our Land and Ocean Discussion Paper Series. Below I outline some of the key messages from the Latin America and Caribbean-focused papers.

How ecosystem degradation in Brazil impacts external accounts

Guilherme Klein Martins and colleagues provide insights on balance-of-payment and exchange-rate risks, mapping how ecosystem degradation feeds through to a country’s external accounts. Taking Brazil as a detailed case study before extending the lens to the wider region, the authors show that a significant share of Brazil’s foreign exchange earnings comes from sectors highly dependent on ecosystem services such as precipitation regulation, soil fertility and water availability. Disruptions to those services can reduce and destabilise export revenues, raise import costs and tighten external financing through higher risk premia.

Within Latin America, the output of even the least exposed economy in the authors’ sample is at least moderately dependent on ecosystem services. Paraguay and Ecuador sit at the high-dependence tail, with the econometric evidence pointing to a link between biocapacity losses and outsized exchange-rate movements. These findings demonstrate that protecting ecosystem services is a precondition for macroeconomic stability, especially in countries dependent on nature for export goods.

Macroeconomic impacts of land-use change in Argentina

Pablo Bortz and Nicole Toftum trace how agricultural expansion and intensification in Argentina have rippled through to balance-of-payments dynamics, inflation and financial stability. They demonstrate the temporal dimension of land degradation, highlighting how the short-term and long-term effects on macroeconomic stability run in opposite directions. This creates a policy dilemma that standard frameworks may not capture. In the short term, exchange rate devaluations and commodity price surges boost export revenues, driven by land degradation. In the longer term, such dynamics can further accelerate land degradation, thus reducing long-run productivity and generating inflationary pressures that constrain investment. Droughts, frosts and extreme heat directly disrupt crop yields and, through their effect on foreign-exchange accumulation, present material risk to monetary policy implementation.

A difficult policy dilemma is revealed, one that faces many commodity-dependent emerging markets: short-term export expansion comes at the cost of the ecological foundations on which that export capacity ultimately rests.

Pricing nature across borders – with a focus on Colombia

Paola D’Orazio and colleagues shift the focus onto financial markets. Drawing on loan-level data from Colombia (one of the world’s most biodiverse countries) and a new global index of nature-related financial policies (NRFPs), they show that biodiversity is already being priced into cross-border credit. When banks headquartered in stricter NRFP jurisdictions lend to Colombian firms exposed to biodiversity degradation, they charge higher spreads and extend longer maturities, without withdrawing credit altogether. The effect is concentrated under disclosure- and principles-based policies, suggesting that transparency tools, rather than blunt credit restrictions, are the primary channel of transmission.

For policymakers in biodiverse emerging markets, this finding is both a warning and an opportunity: NRFPs abroad are already raising the cost of finance at home, but better domestic disclosure and supervisory frameworks could reduce the information premium and improve the terms on which nature-exposed firms access capital. Banks are already pricing this in, even if they are not communicating it, showing that banks themselves deem biodiversity-related transition risks as material.

Diverging environmental law enforcement and financial stability in Brazil and Chile

Cristina Ortega and Matias Ossandon Busch demonstrate that the credibility of environmental governance has direct and measurable effects on credit allocation. When Brazil sharply reduced staffing at its federal environmental agency (IBAMA) in 2019, banks responded by expanding credit to agribusinesses in high-deforestation-risk municipalities. These credit flows were followed by measurable increases in actual deforestation. The opposite happened in Chile, where the gradual establishment of regional environmental courts prompted banks to reduce lending to environmentally risky firms.

This paper is important in demonstrating that enforcement credibility can be viewed as a financial variable and its deterioration can build transition and reputational risk within bank portfolios.

The European Union Deforestation Regulation and the Honduran coffee sector

Jodie Keane and colleagues broaden the frame beyond domestic ecosystem dynamics to examine how environmental trade policy can transmit nature-related risks across borders. They examine the impacts on the coffee sector in Honduras of the EU Deforestation Regulation (EUDR), which prohibits the sale of commodities linked to deforestation.

Coffee accounts for roughly 30% of Honduras’s agricultural GDP and around 22% of total exports, with EU sales representing approximately half of all coffee exports and 7% of the country’s foreign exchange. Over 90% of production is carried out by smallholder farmers who face severe barriers to compliance. This includes limited access to credit, weak traceability systems and an absence of formal land titles. Around 20% of Honduras’s total exports are at risk of exclusion from EU markets. While aggregate bank exposure to the coffee sector is relatively low, certain individual institutions carry concentrated credit risk, with potential for regional spillovers.

Resonating globally is the critical finding that transition risks and physical climate risks can compound one another – as climate shocks and regulatory exclusion can interact to amplify financial and trade vulnerabilities simultaneously.

The policy imperative

Across these five papers, a consistent lesson emerges: nature risks are already altering exchange rates, agricultural productivity, borrowing costs and the direction of credit. Central banks, financial supervisors and fiscal authorities in Latin America and beyond need to integrate nature-related risks into their standard toolkits. The evidence base to do so is growing, and CETEx will continue to support that process.

The full papers are available in the CETEx Land and Ocean Discussion Paper Series.