Canadians' net liabilities to non-residents fell to its lowest level in more than two decades during the second quarter, as the nation's assets abroad surpassed the $1-trillion mark for the first time.

Canada's net external liabilities (the difference between its external assets and foreign liabilities) hit $153.8 billion, down $7.1 billion from the level at the end of the first quarter. These net external liabilities have tumbled by more than 15% from $181.1 billion at the end of 2004.

The decline in net external liabilities was largely attributable to a 2.1% increase in the value of international assets, which hit $1,009.1 billion. This was the first time Canada's assets abroad exceeded one trillion dollars.

Chart 1
Canada's international investment position

On the liability side, increases in foreign direct investment in Canada and in bank deposits led to a 1.2% rise in Canada's international liabilities to $1,162.9 billion.

As a result, net external liabilities at the end of June represented 11.4% of Canada's gross domestic product, down from 12.1% at the end of March. This ratio has steadily decreased since the 20.1% observed only two years ago.

During the second quarter, the Canadian dollar lost ground against the US dollar but made gains against the other major currencies.

Assets: Big jumps in Canadian direct investment abroad and in holdings of foreign bonds

Canadian direct investment abroad reached $462.0 billion at the end of June, up $9.4 billion from the end of March. This increase came mostly from long term capital injections and reinvested earnings in existing subsidiaries abroad.

Canadian direct investment in the United States rose to $213.3 billion, representing more than 46% of total Canadian direct investment abroad.

Canadian holdings of foreign bonds surged almost 8% to $67.8 billion, the highest value on record. Canadians bought $4.8 billion worth of foreign bonds during the second quarter, an active quarter for this type of instrument. Almost all the increase was directed to US bonds.

Canadian holdings of foreign bonds have more than doubled since the beginning of the century, an indication that Canadian investors are taking more and more interest in foreign bonds, mostly American.

Canadian holdings of foreign stocks remained largely unchanged at $185.6 billion at the end of June, as net acquisitions of foreign stocks in the second quarter were offset by exchange rate related valuation declines.

Canadian holdings of US stocks rose $3.7 billion to $99.6 billion at the end of June. During that time, the S&P 500 gained about 1%.

Canada's international reserves fell to $41.8 billion, a $1.3-billion decline from the previous quarter. At the same time, the deposit assets of Canadians increased $6.5 billion to a record $128.9 billion.

Liabilities: Record high foreign direct investment in Canada

Foreign direct investment in Canada, which represents about one-third of total liabilities, went up $5.2 billion to a record $376.7 billion. Foreign direct investors increased their investment position in Canada mainly through acquisitions and reinvested earnings in existing subsidiaries.

Foreign direct investment from the United States rose to $244.3 billion, which accounted for nearly two-thirds of total foreign direct investment in Canada.

For a third consecutive quarter, foreign holdings of Canadian securities (bonds, shares and money market instruments) increased slightly during the second quarter. They totalled $535.8 billion, up $1.5 billion.

There was little variation in each type of security individually. Foreign holdings of Canadian bonds reached $406.6 billion, up $1.4 billion from the end of March. Foreign holdings of Canadian money market paper increased $1.1 billion to $19.7 billion.

Foreign investors sold Canadian shares during the second quarter. At the end of June, they held $109.5 billion worth of shares, down $1.0 billion.

While the position of Canadian shares held abroad declined, the S&P/TSX composite index, which represents the performance of the Canadian stock market, gained over 3% during that time.

Finally, Canadian deposit liabilities to non-residents increased $6.0 billion to $181.2 billion.

Chart 2
Canada's net international liability to GDP