Canada’s net international investment position reaches $2,062.4 billion, driven by market shifts and currency fluctuations.
Canada’s financial standing on the global stage continued its upward trajectory in the second quarter of 2024, as the country’s net international investment position (NIIP), which reflects the difference between its international financial assets and liabilities, reached an impressive $2,062.4 billion, an increase of $88.6 billion from the previous quarter, according to data released by Statistics Canada.
The growth in Canada’s NIIP has been largely attributed to favorable market price changes and the impacts of foreign exchange rates. Since the end of 2022, Canada has seen a consistent rise in its foreign asset position, bolstered primarily by the robust performance of the U.S. stock market, which has continued to outpace its Canadian counterpart.
A closer look at the numbers reveals that market price fluctuations accounted for a $66.6 billion increase in Canada’s net foreign asset position during the second quarter. Despite a 1.3% decline in Canadian stock market prices, the U.S. market’s 3.9% rise played a pivotal role in boosting Canada’s financial assets. Given that nearly 70% of Canada’s international assets and 42% of its liabilities are held in equities, the performance of global stock markets, especially in the U.S., has a significant impact on overall NIIP.
Currency movements also contributed to the increase, with the revaluation effect from exchange rate shifts adding $36.6 billion to Canada’s net foreign asset position. Over the course of the quarter, the Canadian dollar weakened by 1% against the U.S. dollar, 1.1% against the Euro, and 1.5% against the British pound. Since 97% of Canada’s international assets are denominated in foreign currencies, the depreciation of the Canadian dollar led to a higher valuation of these assets when expressed in Canadian terms. In contrast, only 41.8% of Canada’s liabilities are held in foreign currencies, mitigating the effects of currency fluctuations on the liability side.
The geographical distribution of Canada’s foreign asset position highlights its deep financial ties with the United States. By the end of the second quarter, Canada’s net foreign asset position with the U.S. surged by $143.8 billion to $1,669.6 billion. This increase was driven by the combination of a depreciating Canadian dollar and the divergence in stock market performance between the two nations, with the U.S. market rising while the Canadian market dipped.
However, Canada’s net foreign asset position with the rest of the world did not fare as well, declining by $55.2 billion to $392.8 billion. This decrease underscores the importance of Canada’s economic relationship with its southern neighbor, especially in times of global market volatility.
Canada’s total international assets grew by $217.5 billion (+2.3%) in the second quarter, reaching $9,717.2 billion by the end of June 2024. This increase was driven by a combination of factors: sizable acquisitions of foreign assets (+$99.0 billion), revaluations stemming from market price shifts (+$61.4 billion), and the aforementioned currency fluctuations (+$53.1 billion).
On the other side of the equation, Canada’s international liabilities also rose, reaching $7,654.7 billion after a $128.9 billion (+1.7%) increase. Much of this growth came from foreign investments in Canada, particularly in debt securities and direct investment, primarily through mergers and acquisitions. Foreign acquisitions of Canadian debt securities accounted for $110.7 billion of the increase, reflecting a growing appetite for Canadian financial instruments.
Interestingly, the exchange rate movements also contributed $16.7 billion to the rise in liabilities, while market price changes slightly offset the growth by $5.2 billion.
Another key development in the second quarter was the sharp rise in Canada’s gross external debt. At the end of June, the total value of Canadian debt instruments held by foreign investors stood at $4,272.8 billion, representing an increase of $113.5 billion (+2.7%) compared to the previous quarter. This figure now amounts to 142.2% of the country’s gross domestic product (GDP), highlighting the growing influence of foreign-held debt on Canada’s economy.
The government sector recorded the largest quarterly increase in its gross external debt on record, with a rise of $62.2 billion to $749.9 billion. This spike was largely fueled by foreign purchases of federal government debt securities, demonstrating strong international confidence in Canada’s fiscal stability.
The financial sector remains the largest contributor to the country’s gross external debt, with a total of $2,537.2 billion. Notably, nearly 60% of this debt is held in short-term instruments, those with an original maturity of less than one year, reflecting the financial sector’s reliance on short-term borrowing from international markets.
While the Canadian government’s debt levels are rising, the overall growth in assets suggests that Canada is well-positioned to weather potential economic storms. However, with the global economy facing uncertainties, particularly in equity markets and currency exchange rates, Canada’s financial standing on the international stage will remain closely tied to developments beyond its borders.