Double-edged foreign flows: Barclays

• Foreign investment is likely to flow into countries with high historical returns on
capital. Balance of payments data can help to identify countries with particularly
high returns on foreign investments in bonds and equities, and on foreign direct
investment. We find returns on foreign investments have been high in Malaysia,
the Philippines, Thailand and Indonesia, which bodes well for future inflows.
Returns have been low in Korea and Taiwan, and average in Singapore and India.
• The flip side of large foreign investment flows in the past and high returns on
foreign capital is deterioration of the current account balance (via increasing
income outflows). Indonesia and Thailand stand out on this measure.
• Moreover, even countries with a large amount of foreign assets – often in the
form of foreign exchange reserves, which earn low yields – regularly experience
a negative impact. Countries with high levels of reserves such as China, Thailand,
the Philippines and Malaysia should benefit from reserve diversification, which
could add to intra-regional bond demand
• Indonesia and India would benefit most from structural reforms targeting their
current account deficits. Otherwise, given their large funding needs and low
reserve coverage ratios, they are likely to continue to suffer large losses on their
external positions.

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