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Canada's International Investment Position
First quarter 2006

Analysis — First quarter 2006

Canada's net external liabilities declined by 8.4% from the previous quarter and represented a record low 10.9% of gross domestic product (GDP).

Net external liabilities (the difference between Canada's external assets and foreign liabilities) reached $154.3 billion at the end of the first quarter, down $14.2 billion from the end of 2005.

The value of international assets totalled $1,053.0 billion, up 3.6% from the previous quarter. Gains in direct investment abroad and holdings of foreign bonds explained a large portion of this increase.

Chart 1Canada's international investment position

On the other hand, international liabilities reached $1,207.4 billion, a 1.9% increase from the 2005 year end. The gain was mostly due to increases in foreign direct investment in Canada.

Net external liabilities at the end of March represented a record low 10.9% of Canada's GDP, down a full percentage point from the end of December. As recently as the end of 2002 this ratio was 17.6%.

The Canadian dollar depreciated slightly against all major foreign currencies in the first quarter. This increased the value of international assets and foreign liabilities by $7.6 billion and $2.6 billion respectively.

New treatment of allowances

 In the international investment position, allowances have been shown as a separate asset category. These are allowances for expected losses on loans and other credits by the federal government and financial institutions.

The availability of specific data on allowances has been reduced and there is no longer sufficient data to support a separate series on allowances. Therefore data on loans and other asset categories are now presented on a net basis as of the first quarter 2003. As a result, allowances will no longer be presented as a separate category. Data for prior years will remain available for now, pending the next historical revision of these data.

Estimates at market value

As of the first quarter of 2005, total portfolio investment (equities, bonds and money market instruments) are available at market value. Annual market value estimates of foreign direct investment are also available and were released earlier this year. These additional series are part of a multi-year initiative to improve the international investment position information. The following analysis focuses on the book value series, however, and this practice will continue until a full set of market value estimates becomes available.

 Currency valuation

 The value of assets and liabilities denominated in foreign currency are converted to Canadian dollars at the end of each period for which a balance sheet is calculated. Most of Canada's foreign assets are denominated in foreign currencies while less than half of our international liabilities are in foreign currencies.

 When the Canadian dollar is appreciating in value, the restatement of the value of these assets and liabilities in Canadian dollars lowers the recorded value. The opposite is true when the dollar is depreciating.

Chart 2Canada's net international liability to GDP

Rise in Canadian portfolio investment abroad

Canadian holdings of foreign bonds continued its long-term upward trend during the first three months of this year with the strongest quarterly gain on record. In fact, Canadian holdings of foreign bonds rose $10.4 billion to a record $92.8 billion at the end of the quarter.

Canadians increased their holdings of US bonds by 11% while they increased their holdings of overseas bonds by 18%.

Driven by this increase, total Canadian portfolio (holdings of stocks, bonds and money market paper) investment abroad reached $300.8 billion at the end of March. It represented 29% of Canada's international assets at the end of the quarter, a growing proportion.

Holdings of foreign stocks reached $193.9 billion, up $4.7 billion from the end of 2005, as Canadians purchased mostly US shares in the first quarter.

While investment in foreign bonds has surged recently, holdings of foreign stocks have been more stable. These holdings represented 65% of total Canadian portfolio investment abroad at the end of the first quarter compared to 80% at the end of 2002.

Canadian holdings of foreign money market paper increased $1.0 billion to $14.1 billion at the end of the first quarter.

Canadian direct investment abroad up

Canadian direct investment abroad reached $477.8 billion at the end of March, up $12.7 billion from the end of December. This increase came mostly from injections of working capital into existing foreign affiliates and from revaluation of existing assets abroad.

Canadian direct investment in the United States reached $219.6 billion (up $5.9 billion) at the end of March. At the same time, direct investment in all other countries increased $6.9 billion to $258.2 billion.

Liabilities: Increase in foreign direct investment in Canada

Foreign direct investment in Canada rose $8.6 billion to $424.2 billion at the end of March. 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 reached $270.4 billion, up $3.9 billion from the previous quarter. The United States accounted for almost two-thirds of total foreign direct investment in Canada.

Foreign holdings of Canadian stocks increased $2.7 billion to $110.3 billion at the end of the quarter. Again, American investors held the majority of the value with 90% of the total.

Foreign investors made significant investments in Canadian money market paper for a second consecutive quarter. As a result, foreign holdings of Canadian money market paper increased $2.1 billion to $22.9 billion. At the same time, foreign investors slightly reduced their investment in Canadian bonds. At the end of March, foreign holdings of Canadian bonds were down by less than a billion to $379.3 billion.

As Canada's international liabilities have increased over time, the composition has changed. The proportion of debt instruments in the international liabilities has been declining while the proportion of equity investments has been increasing.

The proportion of total foreign liabilities represented by bonds and money market paper at the end of 2005 was just 34%, down from 50% at the end of 1995. The largest gain in proportion was in foreign direct investment, which increased from 22% in 1995 to 35% at the end of 2005. At the same time, portfolio holdings of Canadian shares almost doubled its proportion up from 5% to 9%.

Foreign direct investment 2005 

Foreign direct investment in Canada increased three times faster than Canadian direct investment abroad through 2005, mainly as the result of the soaring Canadian dollar which lowered the value of existing investments abroad.

Chart 3Foreign direct investment position

Foreign direct investment in Canada increased by more than 9% while Canadian direct investment abroad rose by only 3%.

Foreign direct investment in Canada reached $415.6 billion at the end of 2005, up $34.6 billion from a year earlier. This increase mostly came from acquisitions and injections of funds from the parents in the working capital of Canadian affiliates. Foreign direct investment in Canada has continually increased since the mid-1930s.

At the same time, Canadian direct investment abroad reached $465.1 billion, up from $451.4 billion at the end of 2004. The appreciation of the Canadian dollar lowered the position by $30.0 billion as Canadian direct investments abroad are denominated in foreign currencies. However, the value of capital transactions during the year more than offset this effect.

As a result, the net direct investment position (the difference between Canadian direct investment abroad and foreign direct investment in Canada) decreased to $49.5 billion at the end of 2005, down from a revised $70.4 billion a year earlier.

In 2005, the Canadian dollar gained 3.4% against the US dollar, 15.2% against the pound sterling, 19.0% on the Japanese yen and 18.3% on the Euro.

Note to readers

Direct investment is a category in the financial account of the international investment position, which refers to investment of a resident entity in one country obtaining a lasting interest in an enterprise resident in another country. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise.

In practice, direct investment is deemed to occur when a company owns at least 10% of the voting equity in a foreign enterprise. In this report, direct investment represents the cumulative year-end positions.

In the Canadian statistics, direct investment is measured as the total value of equity, net long-term claims and net short-term claims held by the enterprise across the border.

Direct investment is often channelled through intermediate holding companies or other legal entities before reaching its ultimate destination. Since these entities are generally in the financial sector, this sector accounts for a larger share on an immediate investor basis than if the ultimate destination were known.

Market value estimates

Direct investment position series are at book value. However with this annual release, we introduce for the first time provisional aggregate estimates of foreign direct investment at market value. The estimates and more details are available in the publication Latest Developments in the Canadian Economic Accounts ( 13-605-XIE2006002 , free).

Direct investment up in the United States, down in European countries

Direct investment assets in the United States increased $17.4 billion to $213.7 billion, mostly as a result of capital outflows to existing operations located south of the border.

The share of US investment increased for a second consecutive year, accounting for 46% of total direct investment abroad at the end of 2005, up from 43% a year earlier.

The strengthening Canadian dollar against the euro and the pound sterling had a negative impact on direct investment assets in European countries. The value of Canadian direct investment in the United Kingdom fell $1.7 billion to $42.7 billion although the United Kingdom remained the second most popular destination for Canadian direct investment abroad.

Canadian direct investment in France fell a significant 14%, as did investment in the Netherlands (-19%). However, these countries are still favourites for Canadian direct investors abroad. France, the Netherlands, Ireland and United Kingdom were the only European nations in the 10 top countries for Canadian direct investment abroad at the end of 2005.

Canadian direct investors continued to invest in Caribbean countries at the end of 2005. Barbados with $34.7 billion of direct investment, a 13% gain, was the third most popular country for direct investment after the United States and the United Kingdom.

Brazil was the only new country in the top 10 at the end of 2005, replacing Japan where investments declined 13% to $7.4 billion. Canadian direct investment in Brazil increased 14% to $8.0 billion.

Canadian direct investments at the end of 2005 were spread over 150 countries on all continents, including more than 30 countries with at least $1 billion in investment.

At the end of 2005, foreign direct investment assets were mainly in the finance and insurance industry (44%), in the energy industry (12%) and in the metallic minerals industry (11%). The share of Canadian direct investment in finance and insurance sector has doubled in the past two decades while the share of the metallic minerals sector decreased from 17% to 11%.

Chart 4Canadian direct investment abroad 2005 - Geographical distribution

United States holds nearly two-thirds of foreign direct investment in Canada

American investors held $266.5 billion in the form of direct investment at the end of 2005, up $18.0 billion from 2004.

About $11.6 billion of this gain went to the energy sector, which is the favourite for American direct investors. American direct investors have increased their position in the Canadian energy sector by more than 150% since 2000.

American direct investors were still by far the most important in Canada, holding nearly two-thirds (64%) of the total. Four European countries followed in order — the United Kingdom with $29.9 billion in foreign direct investment in Canada; France, $28.4 billion; the Netherlands, $21.7 billion; and Switzerland, $13.0 billion.

As it did for direct investment abroad, Brazil was the only new country to join the top 10 list of Canada's major partners for direct investment in Canada.

The 10 major investor countries accounted for 95% of the total, suggesting foreign direct investment in Canada is concentrated among major developed countries. However, almost 100 countries had direct investment positions in Canada at the end of 2005.

The finance and insurance sector accounted for 21% of foreign direct investment in Canada at the end of 2005, followed by the energy sector at 20%. The share of the energy sector in foreign direct investment has almost doubled since 1999, going from 11% to 20%, the same as it was in 1987.

Decline in Canada's net direct investment position

Canada's net direct investment position declined $20.9 billion to $49.5 billion at the end of 2005. The nation's net direct investment position has been positive for the last nine years and has contributed positively to the increase in Canada's net international investment position.

Canada has a positive net direct investment position with most of its partners. However, at the end of 2005, the net direct investment position of Canada with the United States was a negative $52.8 billion.

Net direct investment with the United States has never been positive. In other words, American direct investors have always held more assets in Canada than Canadian direct investors have held assets south of the border.

Chart 5Foreign direct investment position with the United States

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Date Modified: 2006-07-06 Important Notices