Recent Cross-border
Financial Activity
Working Party on Trade on Goods and Services
November 2009
Cross-border financial activity increased
in recent years…
 Increased liberalization of international flows (online
brokers, mergers and acquisitions activity)
 Increased use of new investment vehicles (Assetbacked securities, derivatives)
 Increased number of participants in the market
(small investors, public pension plans)
 Regulatory changes
 Increased outward direct investment; increased M&A
activity
Canada’s exposure to foreign financial
markets has increased
Canada's international portfolio investment position at market value
billions of dollars
800
700
Portfolio liabilities
600
500
Portfolio assets
400
300
200
100
Net portfolio position
0
-100
-200
-300
-400
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Impact of regulatory changes on foreign
investment
billions of dollars
FPR
12% - 18%
20%
25%-30%
No restriction
75
60
45
30
15
0
-15
-30
1990
1992
1994
1996
1998
Debt securities
1. Reverse of Balance of Payments signs.
2000
2002
Stocks
2004
2006
2008
Canadian holdings of foreign securities:
a country perspective
Holdings of foreign securities: Geographical distribution
%
70
65
60
United States
55
50
45
40
35
Europe and Asia
30
1997
1999
2001
2003
2005
2007
Concentration of investment in foreign
equities: % Share for selected countries
%
100
Canada
Australia
75
US
50
UK
World
25
Japan
0
2001
2002
2003
2004
2005
2006
2007
2008
Increased outward FDI activity and
geographical diversification
Canadian dire ct inv e stme nt abroad
Ge ographical distribution
100%
$79.8 B.
$637.3 B.
90%
80%
Other
countries
70%
As ia/Oceania
60%
Caribbean
50%
Europe
40%
30%
United States
20%
10%
0%
1988
2008
Less geographical diversification for
inward FDI
Foreign direct investment in Canada
Geographical distribution
100%
$114.2 B.
$504.9 B.
90%
80%
Other
countries
70%
As ia/Oceania
60%
Caribbean
50%
Europe
40%
30%
United States
20%
10%
0%
1988
2008
Summary
 Higher Canadian demand for foreign
securities:
•
•
•
•
Increased exposure to global financial markets
Increased exposure to markets’ volatility
Increased exposure to currency fluctuations
Increased exposure to financial shocks
 Higher Canadian direct investment abroad:
• Increased exposure to foreign economies
Recent financial events evidenced by
the international accounts program
 Key issue: Canadian institutional investors’
reactions to deteriorating global credit
conditions in 2007
● Immediate
● Marked
● Sustained
Rapid-sustained change in Canadian portfolio
investment at outset of global credit concerns
billions of dollars
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
I
II
III
IV
I
II
2005
III
2006
IV
I
Foreign debt instruments
1. Reverse of Balance of Payments signs.
II
III
2007
IV
I
Foreign stocks
II
III
2008
IV
I
2009
II
Reduction in holdings of foreign debt in
response to global credit concerns
billions of dollars
10
8
6
4
2
0
-2
-4
-6
-8
-10
J
J
2006
J
2007
Foreign debt
1. Reverse of Balance of Payments signs.
J
2008
J
2009
Holdings of foreign short-term paper
reduced drastically in August 2007
billions of dollars
6
4
2
0
-2
-4
-6
-8
-10
-12
III
2005
IV
I
II
III
IV
2006
Government
1. Reverse of Balance of Payments signs.
I
II
III
2007
Corp Fin
IV
I
II
III
2008
Corp Non-fin
IV
I
II
2009
Investment in foreign long-term debt
instruments also declined
billions of dollars
21
15
9
3
-3
-9
-15
III
IV
I
II
III
IV
Maple Bonds
1. Reverse of Balance of Payments signs.
I
II
III
IV
Other Bonds
I
II
III
IV
I
II
Canadians repatriated funds for the
first time in 30 years
billions of dollars
90
80
70
60
50
40
30
20
10
0
-10
-20
1979 1981
1984
1987
1990
1993
1996
Foreign securities
1. Reverse of Balance of Payments signs.
1999
2002
2005
2008
… to invest in relatively safe government
of Canada T-bills
billions of dollars
22
18
14
10
6
2
-2
-6
-10
Jun
Dec
Mar
2008
Net new issues
Jun
2009
Net purchases from non-residents
Foreign demand for T-bills continued in
2009 and expanded to federal bonds
Foreign portfolio investment in Canada
billions of dollars
35
30
25
20
15
10
5
0
-5
-10
-15
I
II
III
2005
IV
I
II
III
2006
bonds
IV
I
III
II
2007
IV
money market
I
III
II
2008
IV
I
2009
II
Canadians returned to foreign markets,
mostly stock markets in 2009
Canadian portfolio investment abroad1
billions of dollars
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
II
2005
III
IV
I
II
III
IV
2006
Debt securities
1. Reverse of Balance of Payments signs.
I
II
III
IV
I
2007
II
2008
Stocks
III
IV
I
2009
II
Foreign direct investment lost steam as
of 2008
Foreign direct investment¹
billions of dollars
60
50
40
30
20
10
0
-10
II
III
2005
IV
I
II
III
2006
IV
I
II
III
2007
IV
I
II
III
2008
IV
I
II
2009
Foreign direct investment in Canada
Canadian direct investment abroad
1. Reverse o f B alance o f P ayments signs fo r Canadian direct investment abro ad.
Mergers and acquisitions mostly explained
the reduced inward activity
Foreign direct investment in Canada
billions of dollars
100
90
80
70
60
50
40
30
20
10
0
-10
I
II
III
2005
IV
I
II
III
2006
Acquisitions
IV
I
II
III
2007
IV
I
II
III
2008
Other
IV
I
II
2009
Survey vehicles for the measurement of
portfolio investment
 Canada’s international transactions in
securities (monthly)
• Foreign investment in Canadian securities
• Canadian investment in foreign securities
 Other position surveys – Annual
• Inward
• Outward - CPIS
• Book and market value
Summary
Immediate, marked and sustained reaction of Canadian
institutional investors in mid-2007 with respect to their
holdings of foreign securities … prelude to financial
crisis that erupted in the late summer and fall of 2008?
Current reluctance of these same investors to rebuild
holdings of foreign securities, especially debt
instruments … sending a signal about perception of some
degree of fragility in global financial markets?
Comments/questions?