Canada's international investment position

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Canada's net external liabilities continued their long-term decline during the first three months of 2007 as international assets rose at a faster pace than external liabilities.

As a result, net external liabilities (the difference between Canada's external assets and foreign liabilities) reached $92.2 billion at the end of the first quarter, down $6.8 billion from the end of 2006.

The value of international assets totalled $1,230.7 billion, up 3.4% from the 2006 year-end. Gains in Canadian holdings of foreign bonds explained almost 40% of the increase. Appreciable gains in Canadian direct investment abroad and in reserve assets also contributed to this increase.

On the other hand, international liabilities reached $1,322.9 billion, a 2.6% increase from the previous quarter. The gain was mostly due to increases in foreign direct investment in Canada and in deposit liabilities.

Net external liabilities at the end of March represented a record low 6.2% of Canada's gross domestic product, down from 6.8% a quarter earlier and down from 17.6% at the end of 2003.

The gap between Canadian international assets and liabilities continued to shrink. At the end of March, Canada's international assets represented 93% of its foreign liabilities, a record high ratio. This ratio has been rising progressively since the end of 1993, when it was only 50%. Lower holdings of federal government bonds by non-residents, as the government paid down its debt, and stronger investments in foreign securities contributed to this change.

The Canadian dollar remained stable compared to major foreign currencies in the first quarter; it gained 0.9% against the US dollar and 0.4% against the pound sterling. On the other hand, it lost 0.4% and 0.1% against the Euro and the Japanese yen respectively. The overall exchange rate variation of the Canadian dollar vis-à-vis foreign currencies lowered Canada's international assets by $6.3 billion and its liabilities by $3.2 billion.

In general, a strong Canadian dollar has a negative impact on international assets. In the past few quarters, the Canadian dollar has considerably appreciated, but improvements in net assets through transactions have more than offset this effect.

Assets: strong rise in Canadian holdings of foreign bonds

Canadian holdings of foreign bonds increased 12.5% to $144.5 billion, as Canadians made strong purchases during the quarter, especially in maple bonds. This was the 10^th consecutive quarterly increase of at least 8%. Over that period, holdings of foreign bonds, as a proportion of international assets, have doubled from 6% to 12%.

Holdings of foreign stocks rose 2.2 billion from the end of 2006 to $218.4 billion, with about half of the increase allocated to US stocks. At the same time, Canadian holdings of foreign money market paper remained stable at $20.1 billion.

Driven by these increases, total Canadian portfolio investment abroad (holdings of stocks, bonds and money market paper) reached $383.0 billion at the end of March, representing 31% of Canada's international assets.

Canadian direct investment abroad totalled $532.0 billion at the end of March, up $8.7 billion from the end of December. This advance came mostly from injections of working capital into existing foreign affiliates.

Official international reserves reached their highest level in three years at $45.5 billion.

Liabilities: increase in foreign direct investment in Canada

Foreign direct investment in Canada rose $12.4 billion to $461.3 billion at the end of March. For a third consecutive quarter, foreign direct investors increased their investment position in Canada, mainly through acquisitions of Canadian firms.

Foreign direct investment from the United States reached $281.0 billion, up $7.3 billion from the previous quarter, while foreign direct investment from all other countries amounted to $180.3 billion.

Foreign holdings of Canadian securities (bonds, stocks and money market paper) increased slightly during the first quarter. They totalled $542.8 billion, up $1.1 billion, and represented 41% of total international liabilities.

There was little variation in each type of security individually. Foreign holdings of Canadian bonds rose 3.2 billion from the end of December to $407.8 billion. The gain was mostly attributable to an increase in holdings of corporate bonds.

Foreign holdings of Canadian stocks decreased slightly to $111.3 billion at the end of the quarter, with American investors holding the majority of the value. At the same time, foreign holdings of Canadian money market paper were down by less than a billion to $23.7 billion.

Finally, Canadian deposit liabilities to non-residents increased $19.4 billion to $246.5 billion.

Decline in net external liability position with the United States

American investors continued to hold by far the largest portion of Canada's net external liabilities. At the end of 2006, their holdings amounted to $217.2 billion, down from $233.6 billion a year earlier.

European Union countries decreased in importance as Canada's net creditors. They held only $8.9 billion of Canada's net debt at the end of 2006, down from $37.1 billion a year earlier. Canada is nearing a net asset position with European countries for the first time ever.

Canada's net asset position with all other countries increased to $127.1 billion. Canada has had a net asset position with this group of countries (which excludes the United States and the European Union) since 1998.

Available on CANSIM: tables 376-0037, 376-0039 to 376-0041, 376-0055 to 376-0057 and 376-0059.

Definitions, data sources and methods: survey number 1537.

The first quarter 2007 issue of Canada's International Investment Position (67-202-XWE, free) will be available soon.

For general information, contact Client Services (613-951-1855; infobalance@statcan.gc.ca). To enquire about the methods, concepts or data quality of this release, contact Éric Simard (613-951-7244) or Christian Lajule (613-951-2062), Balance of Payments Division.

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