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| Canada's international investment position
First quarter 2004 Analysis — First quarter 2004 Canada’s international investment position The increase in the value of Canadian assets abroad drove the country’s net liability to foreign residents to its lowest level in more than 18 years during the first quarter of 2004. Canada’s net external liabilities – the difference between its external assets and foreign liabilities – dropped $23.7 billion to $194.2 billion at the end of March. This leaves the ratio of net external liabilities to gross domestic product at 15.5%, down two full points from the 17.7% observed at the end of the fourth quarter of 2003. The value of international assets totaled $931.5 billion, up 2.5% from the fourth quarter. For a second consecutive quarter, Canadian direct investment abroad increased by more than $10 billion and contributed about half of this increase. International liabilities decreased slightly to $1,125.8 billion from a quarter earlier and well below the revised level of $1,177.3 billion at the end of 2002. In sharp contrast to the year 2003, the Canadian dollar lost ground against the US dollar in the first quarter of 2004. The loony lost about 1% against the US dollar but gained almost 1% again the Euro. Chart 1
Increase in Canadian assets abroad Canadian direct investment abroad reached $409.3 billion at the end of March, up $10.1 billion from the end of December, its highest value in more than a year. Exchange rate variation combined with investment of $4.8 billion in the first quarter accounted for most of this increase. Canadian direct investment in the United States rose to $168.8 billion and represented over 41% of total Canadian direct investment abroad. Canadian holdings of foreign bonds surged by almost 7% to $47.7 billion its highest value on record. Canadians bought $2.6 billion of foreign bonds during the first quarter, an active quarter for this type of instrument. At the same time, Canadian holding of foreign stocks reached $191.2 billion, up $2.4 billion from the end of December. Exchange rate variation is responsible for almost all the change in the value as virtually no net acquisitions of foreign stocks took place during the first quarter. Foreign direct investment in Canada increases After two consecutive quarters of small decreases, foreign direct investment in Canada increased $2.4 billion to $360.0 billion at the end of March, a level never reached before. The net direct investment position – the difference between Canadian direct investment abroad and foreign direct investment in Canada – increased to $49.3 billion at the end of the quarter. Important decline in foreign holding of Canadian money market paper Foreign holdings of Canadian money market paper fell more than 12% to $18.7 billion, the lowest level in 17 years. While foreign demand for short term instruments was lower, foreign holdings of Canadian bonds increased $6.3 billion and reached $411.7 billion at the end of March. Out of this total, foreign holdings of federal government enterprise bonds increased by more than 10% to reached $40.6 billion. Foreign investors continued to purchase Canadian shares during the first quarter. At the end of March, they held $86.2 billion worth, a fourth consecutive quarter of increase for this type of investment. The gain in the S&P/TSX composite index for a fourth consecutive quarter certainly played a role in the acquisition of Canadian shares by foreign investors. Canada’s net foreign liabilities with the United States increases The long-term trend in net foreign liabilities shows that American investors hold an increasing proportion of Canada’s net foreign liabilities. For a third consecutive year, Canada’s net foreign liabilities with the United States increased and reached $271.0 billion at the end of 2003. European Union countries have decreased their net creditor position with Canada to $57.8 billion at the end of 2003. Canada has a net asset position with all other countries as a group. Chart 2
Market value of portfolio investment The market value of foreign portfolio investment in Canadian stocks and bonds at the end of March 2004 was tree times higher than it was 14 years ago. Foreign holdings of Canadian stocks and bonds increased from $209.3 billion to $629.3 billion from March 1990 to March 2004. On the other hand, Canadian portfolio investment in foreign stocks and bonds recorded a value that is nine times larger in March 2004 as opposed to March 1990. Canadians held foreign stocks and bonds for a value of $400.8 billion at the end of March 2004 compared to $44.0 billion in March 1990. In terms of stocks, foreign investors have seen their holding of Canadian shares increased from $38.1 billion to $175.9 billion over the last 14 years, with a peak of $274.1 billion reached in September 2000 at the time the S&P/TSX composite index was at an historical high level. The market value of foreign stocks held by Canadians appreciated even more, from $34.8 billion in March 1990 to $348.7 billion in March 2004. In 1999 only, this value increased by 42% while the foreign markets were very strong. Despite the decrease of global financial markets between 2000 and 2002, Canadian investors’ holdings of foreign stocks remained high mostly due to important purchases of foreign stocks and higher foreign content limits for Registered Retirement Savings Plans. Chart 3
Foreign direct investment — 2003 Canadian direct investment abroad was down 7.1% at the end of 2003, mainly the result of the soaring Canadian dollar. The value of assets held abroad by Canadians reached $399.1 billion down from a record $429.6 billion at the end of 2002. This decline halted a string of increases that dated from 1948. At the same time, foreign direct investment in Canada rose 2.5% to $357.5 billion, up from the level of $348.9 billion observed at the end of 2002. As a result, the net direct investment position – the difference between Canadian direct investment abroad and foreign direct investment in Canada – decreased to $41.6 billion at the end of 2003 down from a revised $80.7 billion a year earlier. US assets accounted for only 41% of total Canadian direct investment abroad, the lowest proportion on record. American investors accounted for about 64% of foreign direct investment in Canada. The major reason for the important decrease in direct investment abroad was the appreciation of the Canadian dollar against foreign currencies. Canadian direct investments abroad are denominated in foreign currencies. Consequently, the strengthening dollar lowered the value of assets held abroad by $55.0 billion. In 2003, the Canadian dollar gained 17.8% against the US dollar, 9.0% against the pound sterling, 9.1% on the Japanese yen and 1.7% on the Euro. Chart 4
Direct investment abroad: Assets fell in US Direct investment assets in the United States declined in value by $32.2 billion, or 16.3%, to $164.9 billion. Again, the strengthening Canadian dollar was responsible for most of the decrease, accelerating the decline in the US share of total direct investment assets. Canadian direct investment abroad is continually more and more spread among different countries. The value of Canadian direct investment in all countries, excluding the United States, increased a slight $1.7 billion to $234.2 billion from the end of 2002. The reinvestment of funds by Canadian parent companies and an important acquisition in the fourth quarter more than offset the appreciation of the dollar against other major currencies during the year. Canadian direct investment in France rose a substantial $7.1 billion, or 157%, to $11.6 billion at the end of 2003, the largest gain in investment for any single country. France is now one of the five top countries for Canadian direct investors. It follows the United States, United Kingdom, Barbados and Ireland, which is the destination country with the highest increase over a four-year period. At the end of 2003, foreign direct investment assets held abroad were mainly in the finance and insurance industry (42%) and in the metallic minerals industry (12%). Foreign direct investment in Canada increased The 2.5% increase in foreign direct investment in Canada was due mostly to capital inflows of funds to existing operations by parent companies located abroad. The acquisitions component of foreign direct investment in Canada was slightly negative in 2003. American investors held $228.4 billion in the form of direct investment at the end of 2003, up $5.2 billion. At the end of 2003, the net direct investment position of Canada with the United States was a negative $63.5 billion, a record low. Net direct investment with the United States has never been positive, meaning that American investors have always held more assets in Canada than Canadian investors have held in value south of the border. The most important direct investor countries in Canada were, for a fourth consecutive year, the United States, France, United Kingdom, the Netherlands and Japan. Combined, these five nations held just over 87% of direct investment in Canada at the end of 2003. Finance and insurance industries accounted for 19% of foreign direct investment in Canada at the end of 2003, followed by energy at 17% of the total. Chart 5
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