Low Interest Rates in the USA Are Fueling Foreign Investments?


Emerging FDI appears to be increasing. Thailand, Indonesia, Malaysia, and now India are seeing increasing investments from the United States as investors take advantage of low interest rates to raise capital for investment. In India local investors are selling off stocks in favor of property and gold, but a flood of money from the United States is helping to stave off a major decline in local stock markets. What does this mean for Asia? And perhaps more importantly, what does this mean for the United States?

Low Interest Rates in the USA Are Fueling Foreign Investments?

Low Interest Rates Functions

Low interest rates are supposed to spur business investments. Ask many of America’s working and middle class people and even after years of low interest rates, conditions on the ground seem almost as dire as during the Great Recession. Businesses are ramping up investments, however, it’s just that a huge amount of the capital is flowing overseas.

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India is now emerging as a favorite for foreign institutional investors. Such investors now control just over 21 percent of the stocks for India’s Fortune 500 companies. Foreign investors tend to focus on consumer oriented companies and financial services firms. Of course, foreign investors may want to take note that locals are growing increasing pessimistic. Their on-the-ground knowledge may give them far better insight into fast changing circumstances.

At the same time foreign investment in Indonesia is reaching all time highs. FDI is up over 27 percent through the first quarter, and this comes on top of a massive increase in FDI through 2012. With some 240 million people and a fast emerging economy, Indonesia is becoming an investment hot spot, fueled by low interest rates across the world. Fitch and Moody’s Corporation (NYSE:MCO) have both upgraded Indonesia’s sovereign debt ratings to investment grade and strong consumer demand and economic growth are propelling the country to new heights.

In what should now be a familiar story, FDI is also skyrocketing in the Philippines. In February of 2012 FDI more than doubled from $192 million to $436 million, a staggering sum for the island nation. Foreign companies also pumped in some $275 million dollars into their local offices and operations, which should allow said companies to greatly expand their operations.

Yet this massive growth in FDI calls into question the Fed’s strategy of trying to use low interest rates to propel growth in the United States. Economic growth remains slow and the unemployment is still high. Most “declines” in the unemployment rate are coming from people who are either giving up on finding full time work and accepting part time positions, or are merely giving up on finding a job all together.

If low interest rates are just going to drive up investments abroad, how will the U.S. spur its own economic growth? Policy makers have been trying to figure this out for the last several years, but the answer remains elusive. Swamped with debt the U.S. cannot afford another major stimulus plan. And with the US looking like an increasingly poor investment, many companies are now choosing to invest elsewhere. There seems to be no answer to the present problem, but Fed officials would be wise to go back to the drawing board.