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Canada's International Investment Position Third quarter 2008

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Analysis — Third quarter 2008

Canada's net international indebtedness fell to $58.4 billion at the end of the third quarter, as the value of Canada's foreign assets increased more than its liabilities. This result was largely attributable to higher Canadian direct investment abroad.

Chart 1
Canada's international investment position

Net international indebtedness reaches new low

International assets rose for a fourth straight quarter to $1,343.3 billion, while international liabilities were up for a fourth consecutive quarter to $1,401.7 billion. Increases in international assets (+3.2%) outpaced those of international liabilities (+2.1%) in the third quarter. As a result, net foreign debt fell by $13.1 billion to a 33-year low of $58.4 billion in the third quarter. This represented 3.6% of Canada's gross domestic product, down from 4.4% in the previous quarter.

In addition to investment flows, exchange rate fluctuations led to increases of just over $10.0 billion in both foreign asset and liability values. Although the Canadian dollar depreciated against the US dollar and the Japanese yen during the quarter, this was partially offset by its appreciation against other major currencies. For the year, exchange rate movements have resulted in a $59.7 billion increase in the value of total assets and a $26.4 billion advance in the value of total liabilities.

Higher Canadian direct investment abroad bolsters net positions

Direct investment abroad by Canadian firms rose by $30.6 billion to $593.7 billion in the third quarter, on the largest outflows by Canadian companies in four years. The bulk of this investment was generated from the financial sector and represented an injection of funds into existing foreign subsidiaries. Foreign direct investment in Canada rose by $9.0 billion to $525.7 billion in the third quarter, with merger and acquisition activity in the energy sector accounting for most of this increase. With increases in outward direct investment dominating, Canada's net asset position on direct investment amounted to $67.9 billion, the highest level since the first quarter of 2007.

Note to readers

The international investment position presents the value and composition of Canada's foreign assets and liabilities to the rest of the world. Canada's net international investment position is the difference between these foreign assets and liabilities. Canada is a net debtor nation meaning that our international liabilities are greater than our assets. This excess of international liabilities over assets can be referred to as Canada's net international liabilities or Canada's net foreign debt.

The valuation of the assets and liabilities in the international investment position are measured at book value, unless otherwise stated. Book value represents the value of assets and liabilities recorded in the books of the enterprise in which the investment is made.

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 2
Direct investment position

Portfolio divestment continues

Canadian investors continued to acquire foreign stocks while shedding foreign debt instruments, mainly in US bonds, following the pattern since the third quarter of 2007. Combined with relatively small exchange rate effects, foreign portfolio asset values fell by $1.2 billion during the third quarter.

Non-residents reduced their positions in Canadian equity and debt instruments in the third quarter. However, exchange rate fluctuations more than offset the divestment, as US dollar and Japanese yen denominated bonds appreciated in value by approximately $4.0 billion. The net effect on foreign holdings of Canadian securities was a slight $1.2 billion increase.

Cross-border deposit activity up

Other investment assets increased by $12.0 billion, mostly arising from an increase in deposits abroad. Other investment liabilities increased by $18.1 billion as foreigners resumed deposits in Canadian institutions. Approximately one-third of this increase was due to deposits in US dollars. Volatility in deposit assets and liabilities continues to be focused in inter-company activity in the financial industry.

Value of Canadian equities drops more than foreign equities at market prices

Canada's overall net international investment position can also be calculated with portfolio investment assets and liabilities of tradable securities valued at market prices. By this measure, the drop in net foreign debt was more pronounced, as the value of Canadian stocks held by non-residents decreased by 19.4% compared with a decrease of 10.2% in the value of foreign stocks held by Canadians. A loss of this magnitude in Canadian equities held by non-residents has not been seen since the fourth quarter of 2000. As a result, net foreign debt decreased by $31.2 billion to $14.5 billion.