Canada's international investment position

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Canada's net foreign debt rose by $20.4 billion to $223.8 billion by the end of the third quarter. International liabilities continued to expand, largely on the strength of continued foreign investment in Canadian debt securities, while international assets declined.

Net foreign debt has increased over most of the past seven quarters, in line with current account deficits and reflecting exchange rate fluctuations, to reach 13.8% of Canada's gross domestic product. However, this was below the 40% range of the mid-1990s.

New Canadian borrowing on foreign markets, as well as non-resident purchases of existing Canadian debt securities on secondary markets, led the increase in net foreign debt.

Exchange rate fluctuations continued to have an impact on the value of Canada's international assets and liabilities. Over the quarter, the Canadian dollar gained 3.5% against the US dollar, but lost 7.2% against the Euro, 2.4% against the Japanese Yen and 1.6% against the British pound.

International liabilities continue to rise

International liabilities increased a further $6.9 billion to $1,648.3 billion in the third quarter, albeit at a slower pace than the previous quarter. The large inflows of foreign funds into Canadian bonds were largely offset by a decline in foreign direct investment in Canada and a reduction in the value of foreign currency denominated liabilities. The latter resulted from the downward revaluation effect of the appreciation of the Canadian dollar vis-à-vis the US currency.

International assets continue to be affected by exchange rate variations

Canada's international assets declined $13.5 billion to $1,424.5 billion in the third quarter. With only $0.5 billion of Canadian funds repatriated from abroad in the quarter, this was led by the downward revaluation effect on international assets due to the appreciation of the Canadian dollar against the US dollar. Given the large portion of Canadian foreign investments denominated in US dollars, this more than offset the upward revaluation effect of the depreciation of the Canadian dollar against other currencies.

Reduced foreign direct investment in Canada

Direct investment positions decreased in the third quarter, with foreign direct investment in Canada declining more than Canadian direct investment abroad. For the first time since the second quarter of 2009, foreign direct investors repatriated funds from their Canadian affiliates in the third quarter. The $9.2 billion in funds withdrawn from Canada mostly reflected repayments of debt to foreign parents.

On the other side of the ledger, a large Canadian repatriation of funds from foreign affiliates and a downward exchange rate revaluation on direct investment assets were moderated by Canadian direct investment acquisitions in the United States and the United Kingdom. As a result, Canada's net asset position on direct investment edged up.

Bonds represent an increasing proportion of liabilities to non-residents

Foreign investors further increased their holdings of Canadian bonds in the third quarter by $20.6 billion. The increase was largely due to purchases of private corporate bonds. The balance of the purchases was mainly in federal and provincial bonds, which remained strong, albeit down from the previous quarter. Nevertheless, foreign holdings of these government bonds have increased by nearly 60% since the end of 2008.

Government bonds have increased sharply over most of the last two years to 14% of Canada's international liabilities. This was up from about 10% in 2007/2008 but well below the peak of 27% in 1994.

Strength in foreign stock markets moderate increase in net foreign debt

Canada's overall net international investment position can also be calculated with tradable securities valued at market prices. By this measure, Canada's net foreign debt increased $11.1 billion to $223.6 billion by the end of the third quarter.

The relatively larger gains on foreign stock markets helped moderate the increase in net foreign debt. The value of Canadian holdings of foreign shares increased by $50.2 billion, while non-resident investors' Canadian equity assets increased by $32.2 billion.

Available on CANSIM: tables 376-0055 to 376-0057 and 376-0059.

Definitions, data sources and methods: survey numbers, including related surveys, 1534 and 1537.

The third quarter 2010 issue of Canada's International Investment Position (67-202-X, free) will be available soon.

For more information, contact Client Services (613-951-1855; infobalance@statcan.gc.ca). To enquire about the methods, concepts or data quality of this release, contact Christian Lajule (613-951-2062) or Komal Bobal (613-951-6645), Balance of Payments Division.