International investment position

Fourth quarter 2005

Note to readers

Canada's net external liabilities rose to their highest quarterly level of 2005 at the end of the year as the value of Canada’s foreign liabilities rose at a faster pace than its assets abroad.

Net external liabilities (the difference between Canada's external assets and foreign liabilities) reached $175.8 billion at the end of the fourth quarter, up 1.6% from the third.

However, on a year-over-year basis, net external liabilities were down 2.9% compared to the level of $181.1billion recorded at the end of 2004. This was the third straight year-end decline of Canada’s net external liabilities.

The value of our international assets totalled $1,004.4 billion, up $5.0 billion from the third quarter. An increase in Canadian direct investment abroad and in holdings of foreign bonds explains the increase.

Canada's international liabilities increased $7.9 billion to $1,180.3 billion. An increase in foreign direct investment in Canada was largely responsible for this movement in foreign liabilities.

During the year, foreign liabilities rose $43.7 billion, nearly three-quarters of it the result of foreign direct investment in Canada. At the same time, Canadian assets abroad rose by $49.0 billion, almost half of it coming from increased holdings of foreign bonds.

Net external liabilities at the end of December represented 12.5% of Canada’s gross domestic product. This was unchanged from the end of the third quarter, but somewhat lower than the ratio of 13.7% at the end of 2004.

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The Canadian dollar fell marginally against the US dollar and increased against other major currencies during the quarter. However, at the end of 2005, the Canadian dollar was at 86.0 US cents up about 3% from a year earlier. In 2005, the Canadian dollar gained 15% against the pound sterling, 18% against the euro and 19% against the yen.

Canada's net external liabilities reach highest quarterly level of 2005

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Holdings of foreign bonds significantly increased

Canadian holdings of foreign bonds increased significantly to reach $79.4 billion at the end of the quarter; an increase of 7.3% from a quarter earlier. This represented the tenth consecutive quarterly increase. Most of the increase was directed to US bonds. Canadian holdings of foreign money market paper amounted to $13.1 billion at the end of the fourth quarter, up 4.8% from the third.

Holdings of foreign stocks reached $180.6 billion, up $1.5 billion from the third quarter. The fourth-quarter purchase of foreign stocks was partly offset by a decline in the value of foreign stocks already held resulting from the appreciation of the Canadian dollar against foreign currencies (excluding US dollar).

On a year-over-year basis, Canadian holdings of foreign bonds increased $21.9 billion, or 38.1%, from the end of 2004. Canadian demand for foreign bonds was strong during the entire year as Canadians bought a record amount of bonds during the year. At the same time, Canadian holdings of foreign stocks fell 3.2% from the end of 2004.

Canada's international reserves closed the year at $38.0 billion, down about $500 million from the third quarter, the lowest level since the second quarter of 1999. Canada's international reserve position has followed a downward slope since the peak of $56.2 billion reached at the end of 2002.

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Moderate rise in Canadian direct investment abroad

Canadian direct investment abroad reached $457.3 billion at the end of the fourth quarter, up 1.2% from the end of the third quarter. The increase in direct investment abroad was due to transactions valued at $8.3 billion, which were offset by a $2.7-billion decline caused by the appreciation of the Canadian dollar against overseas currencies.

During 2005, the Canadian direct investment abroad position increased $12.2 billion. Canadian direct investment in the United States increased by $15.5 billion, but this was partially offset by a $3.3-billion decline in Canadian direct investment in all other countries combined.

Foreign direct investment in Canada rose

Foreign direct investment in Canada rose $10.0 billion to $398.4 billion at the end of the fourth quarter. This increase came mostly from acquisitions of Canadian firms by foreign investors, largely from overseas countries.

For the first time in more than two decades, foreign direct investment in Canada surpassed foreign holdings of Canadian bonds as the largest component of the nation’s foreign liabilities.

At the end of December, foreign direct investment accounted for 33.8% of Canada’s liabilities and foreign holdings of Canadian bonds 32.8%.

In 2005, foreign direct investment in Canada increased $32.7 billion compared to the 2004 year-end level.

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Significant quarterly change in foreign holdings of Canadian money market paper

Foreign holdings of Canadian money market paper rebounded strongly in the fourth quarter, after dropping sharply in the third quarter, increasing by more than 17% to $20.8 billion. The position of short-term paper issued by the federal government (including federal government enterprises) rose by $1.9 billion to $14.3 billion.

At the same time, foreign holdings of Canadian bonds reached $387.0 billion at the end of December, down $2.7 billion from the end of September.

Finally, foreign holdings of Canadian stocks increased slightly to $112.8 billion at the end of the fourth quarter. On a year-over-year basis, the foreign position in Canadian stocks increased $4.2 billion. The S&P/TSX Composite Index gained almost 22% in 2005.

Canada's net international liabilities to GDP unchanged

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Statistical table

• International investment position at period-end

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