Canada’s international investment position has surged in the third quarter of 2024, but the gains mask underlying risks that could affect the nation’s economic health in the long term. With net foreign assets climbing by $11.6 billion to reach an impressive $1.865 trillion, Canada’s position looks strong on paper. But a closer look at the factors behind this rise suggests the country’s financial stability is tied to volatile global markets and increasing foreign debt.
The upward movement in Canada’s foreign asset position is not an isolated event. It is part of a broader trend that has seen net foreign assets grow by an eye-popping $628.2 billion year-over-year. Much of this increase can be attributed to the US stock market’s remarkable performance. As Canadian investors continue to increase their exposure to US equities, a strong performance by American markets has propelled Canada’s net asset position higher.
Equity prices have been the main driver, with global stock markets making significant gains. The US market, in particular, rose by 5.5% in the third quarter, and the Canadian stock market, which is heavily tied to global trends, grew by 9.7%. That’s the largest quarterly increase in more than four years, a period of market recovery following the early days of the COVID-19 pandemic. But while the numbers look good, these increases are far from a guarantee of sustained economic health.
The significant majority—nearly 70%—of Canada’s international assets are concentrated in equities. While this may seem like a boon during market rallies, it also makes Canada more susceptible to market volatility. The fluctuations in stock prices—especially in the US—are a double-edged sword. They can swing assets in either direction, which means Canada’s position is precariously tied to the whims of international equity markets.
Canada’s international liabilities, on the other hand, are less concentrated in equities (just 44.4%), and that has created a scenario where asset values are rising faster than liabilities. This favorable disparity has, at least for now, tilted the balance in Canada’s favor.
However, the growth in assets isn’t the full story. Several moderating factors have dampened the effect of the rising stock market, notably Canada’s increased borrowing from abroad. During the third quarter, Canada borrowed $8.4 billion to finance its current account deficit, suggesting a dependence on foreign funds to sustain domestic spending. And currency fluctuations added to the complexity. While the Canadian dollar appreciated against the US dollar, it depreciated against other major currencies like the euro, British pound, and yen, which reduced the overall value of international assets.
On a regional level, Canada’s relationship with the United States has shifted. Canada has been a net creditor to the US since 2016, reversing its previous role as a net debtor. But the third-quarter figures reveal a $21.3 billion decrease in Canada’s net foreign asset position with the US, bringing the total to $1.64 trillion. Meanwhile, Canada’s net foreign asset position with the rest of the world rose by $33 billion, underscoring a diversification of assets away from its largest trading partner.
That diversification comes as no surprise—Canadian investors are increasingly looking outside the US for growth. The country’s holdings of US assets now make up 59% of its international assets, up from 49.5% a decade ago. This trend is a reflection of Canada’s growing reliance on the US financial markets, which have traditionally been the main engine for Canadian investment.
Meanwhile, Canadian liabilities to the United States have been shrinking, from 60.9% of total liabilities a decade ago to 52.3% in 2024. This decline reflects a broader trend of reduced US investment in Canada, particularly in Canadian bonds, and a shifting balance of power in international financial relations.
While the asset picture looks favorable, there is one glaring concern: Canada’s rising external debt. The country’s gross external debt increased by $88.6 billion, or 2.1%, in the third quarter, bringing the total to $4.28 trillion. This now represents a troubling 139.2% of Canada’s GDP.
The government sector alone saw a $42.0 billion rise in its external debt, marking the fourth consecutive quarter of growth. The financial sector, dominated by deposit-taking corporations, accounted for more than half of this external debt, raising questions about Canada’s over-reliance on foreign credit to fuel domestic economic activity. As these foreign liabilities rise, so too does the risk that Canada’s financial system could be exposed to external shocks.
While the rise in Canada’s international investment position looks impressive at first glance, the country’s growing dependence on foreign debt and exposure to global market swings presents serious risks. Canada’s economy may be benefiting from the current market boom, but this dependence on volatile financial markets—particularly in the United States—could spell trouble if the global economy turns sour.
The nation’s growing external debt and reliance on borrowing to finance domestic deficits should serve as a wake-up call. Canada cannot afford to rest on its laurels, assuming strong market returns will continue indefinitely. Moving forward, The key challenge will be to balance asset growth with debt management and reduce reliance on foreign capital to sustain domestic spending. Until then, Canada’s economic stability remains precarious, resting on the uncertain foundations of foreign markets and international credit.