International investment position

Second quarter 2008

International investment position note to readers

Highlights

Canada’s net international investment position, that is, international assets less international liabilities, deteriorated marginally in the second quarter, as the Canadian dollar recovered slightly against major currencies. Essentially, this appreciation had the impact of constraining the growth in Canadian assets, while foreign assets edged down in the quarter. At the same time, liabilities posted a small advance.

Chart G.1 Canada’s international investment position

Net international indebtedness edges up in the quarter

Canada’s international assets decreased marginally in value to $1,283.8 billion, in contrast to the advances of the past two quarters. This was driven by the appreciation of the quarter-end closing value of the Canadian dollar, which more than offset relatively modest investment flows during the quarter.

International liabilities grew in value for a third straight quarter to $1,370.5 billion. This largely reflected substantial net new issues in Canadian bonds in international markets, moderated by a decrease in deposit liabilities.

As a result, net foreign debt increased by $4.2 billion in the second quarter to $86.6 billion. This represented 5.4% of Canada’s gross domestic product, up from 5.2% in the previous quarter. Since the beginning of the year, there has been a $45.3 billion increase in the value of total assets and a $16.1 billion increase in the value of total liabilities due to currency fluctuations. Volatile currency fluctuations continued to have a significant impact, accounting for over half of the increase in the value of net foreign debt during the quarter.

Portfolio investment: Securities drive change in net foreign debt

Canadian investment in foreign securities was relatively slow in the second quarter of 2008. Domestic holdings of debt instruments narrowed, reflecting a divestment of foreign bonds and short-term paper, while Canadians continued to add foreign shares to their portfolios. Despite modest investment, portfolio asset values fell by $3.6 billion during the second quarter. This was mainly due to the revaluation of the stronger Canadian dollar more than offsetting transactions in the quarter.

Foreign investment in Canadian securities reached a high in the second quarter, with activity dominated by debt instruments. Canadian issuers were active on global credit markets with substantial bond issues. At the same time, foreign demand for Canadian money market instruments rebounded with modest investment flows and purchases of Canadian equities were up for the second consecutive quarter. As a result, there was a substantial $21.7 billion increase in portfolio liabilities during the second quarter.

Direct investment: Net position largely unchanged

Canada’s net asset position on direct investment – the difference between Canadian direct investment abroad and foreign direct investment in Canada – amounted to $38.7 billion, a slight decline from the previous quarter. The drop was mainly attributable to the appreciation of the Canadian dollar.

Direct investment abroad by Canadian firms rose by $1.7 billion to $555.0 billion in the second quarter. This increase was comprised of reinvested earnings accruing in foreign affiliates of Canadian firms and Canadian corporations’ foreign mergers and acquisitions, though this activity was down by half from the first quarter. However, the value of this foreign-currency denominated investment was adversely affected by a strengthened Canadian dollar.

Foreign direct investment in Canada rose by $5.6 billion to $516.3 billion in the second quarter. This increase was almost entirely attributable to reinvested earnings accruing from operations of affiliates in Canada. Merger and acquisition activity was negligible in the quarter.

Chart G.2 Direct investment position

Other investments moderate the change in net foreign debt

Other assets went up by $1.5 billion, mostly arising from a small increase in deposits abroad. Other liabilities declined sharply during the quarter as the increase in deposits by foreigners in the previous quarter was reversed. The continued volatility in deposit liabilities is mainly being driven by inter-company activity in the financial industry.

Net international indebtedness up sharply, with securities at market value

Canada’s overall net international investment position can also be calculated with portfolio investment assets and liabilities of tradable securities valued at market prices. By this measure, the increase in net foreign debt ($43.6 billion) was more pronounced in the second quarter. This largely reflected the contrasting gains in Canadian equity markets and losses in foreign equity markets during the quarter. As a result, the value of foreign equities held by Canadian investors declined, while the value of Canadian equity holdings by non-residents increased strongly.

Statistical table

• Table G.1 International investment position at period-end

Information on methods and data quality available in the Integrated Meta Data Base: 1537.