Canada's international investment position

Statscan - Canada's net international investment position continued to deteriorate in the fourth quarter, fuelled by the largest inflow of foreign direct investment in eight years. Net foreign debt rose by $13.3 billion in the fourth quarter to $156.3 billion at the end of 2007, representing 10.0% of Canada's gross domestic product (up from 9.1% in the previous quarter).

International liabilities increase more than assets

Canada's international liabilities increased to $1,338.7 billion, up $27.0 billion from the third quarter. The increase in liabilities was mainly due to strong direct investment inflows, driven by near record merger and acquisition activity. On the other side of the ledger, Canadian holdings of foreign assets increased to $1,182.4 billion, up by a modest 1.2% from the third quarter. Direct investment abroad increased after two quarters of decline, while Canadian holdings of foreign bonds and money market instruments continued to decline.


Canadian dollar has largest ever yearly impact

The total effect of the appreciating Canadian dollar in 2007 was an increase in net foreign debt of $72.5 billion — the largest impact on record. The Canadian dollar gained 17.6% against the US dollar, 16.0% against the British pound sterling, 6.3% against the Euro, and 10.4% against the Japanese yen. However, the appreciation of the Canadian dollar against major currencies stalled during the fourth quarter. The net impact of the exchange rate fluctuations, in the fourth quarter of 2007, was to raise the net foreign debt by a marginal $300 million.

Direct investment

Assets

Direct investment abroad by Canadian firms rose by $12.8 billion to $508.6 billion in the fourth quarter. This 2.6% increase reversed most of the decline in the third quarter and was mainly due to additional working capital provided to foreign affiliates. Mergers and acquisition activity was relatively modest, accounting for 37.9% of the direct investment increase. Year over year, there was a reduction in the value of the position by 2.8%, mainly caused by the strong appreciation in the Canadian dollar.

Liabilities

Foreign direct investment in Canada rose by $27.3 billion to $521.1 billion in the fourth quarter, an increase of 5.5%. This was mainly due to near record mergers and acquisition activity by foreign investors, accounting for 68.1% of the change in the foreign direct investment position in the fourth quarter. The year-over-year change was an increase in the value of the position by 16.1% despite the strong Canadian dollar.

Net direct investment moderately negative

Canada's net position on direct investment, the difference between Canadian direct investment abroad and foreign direct investment in Canada, was moderately negative in the fourth quarter. However, over the course of 2007, this position went from a net asset of $74.4 billion to a net liability of $12.5 billion.

Portfolio investment

Assets

There was a $3.3 billion decrease in portfolio assets during the fourth quarter, mainly due to divestment in foreign bonds. The impact of the Canadian dollar on foreign portfolio assets in the quarter was negligible. However, foreign assets of Canadian investors decreased by $18.7 billion (-5.1%) in 2007, mainly due to the restatement of these foreign currency denominated assets in respect to a strongly appreciating Canadian dollar, and strong divestment of more than half the position in short-term money market paper.

Liabilities

There was a $7.4 billion decrease in portfolio liabilities during the fourth quarter, mainly from divestment in portfolio stock being transferred to foreign direct investors resulting from significant mergers and acquisitions. For 2007, there was a decline of $43.9 billion (-8.1%), attributable mainly to Canadian bonds and stocks.

Other investment

Other assets went up by $4.2 billion, mostly explained by continued increases in deposit assets. Year over year, these deposits increased by 17.3%.

Other liabilities sharply rebounded to $7.1 billion during the quarter, led by a reversal of the decline in deposits by foreigners in the previous quarter. In 2007, the position increased by 7.0% due to strong flows throughout the year.

Decrease in net international indebtedness with portfolio investment at market value

Canada's overall net international investment position can also be calculated with assets and liabilities of tradable portfolio securities valued at market prices. Net foreign debt is lower by this measure. In the fourth quarter, net international indebtedness decreased by $3.9 billion to $91.9 billion. This change reflects both the decline in Canadian and foreign equity markets during the quarter and large divestments of foreign portfolio holdings of Canadian securities, due to merger and acquisition activity at market prices. This resulted in total liabilities remaining relatively flat, as opposed to a large increase in total liabilities at book prices.

For 2007 as a whole, net international liabilities rose by $53.4 billion, which is slightly smaller than the $57.3 billion increase at book value.

Note to readers

Canada's international investment position presents the value and composition of its foreign assets and liabilities owed 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 its international liabilities are greater than its assets. This excess of international liabilities over assets can be referred to as Canada's net international liabilities or Canada's net foreign debt.

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 its 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.