During the last two decades, Canada's net debt with the rest of the world declined. This occurred because the value of Canada's external financial assets increased more rapidly than the stock of foreign claims on Canadian assets.
Canada's net debt with the rest of the world is officially referred to as Canada's net international investment position (net IIP).
Canada's net IIP began improving rapidly in the mid-1990s, and this process continued until 2008. The improvement in Canada's net IIP was the result of Canadians investing more abroad, not foreigners investing less in Canada.
In 1995, the value of Canada's external financial assets was 58% of the value of Canada's financial liabilities to non-residents. This ratio rose to 97% in 2008 after 13 years of outward investments by Canadians. During the subsequent global financial crisis, net IIP widened. By 2010, the ratio of external assets to external liabilities fell to 88%.
Canada's net IIP has three components: direct investment, portfolio investment and other investment. Direct investment consists of debt and equity transactions in which the investor has a "significant voice" in the affairs of the investee. Portfolio investment consists of investments in stocks and bonds where no such direct investment relationship exists. Other investments consist primarily of deposits and loans transactions.
The growth in Canadian portfolio investment abroad in the 1990s was a key factor behind the improvement in Canada's net financial position with non-residents.
From 1995 to 2005, the value of Canadian portfolio investments abroad increased 12.4% annually. This increase was driven by gains in holdings of foreign bonds and foreign stocks.
In current dollars, the value of these external portfolio assets increased from $90.8 billion in 1995 to $292.2 billion in 2005. By 2008, these assets were at $426.3 billion. These gains occurred despite the appreciation of the Canadian dollar over the period, which reduced the Canadian-dollar value of Canada's external assets.
Foreign claims on Canadian portfolio assets also increased during the 1990s, but at a more modest rate. From 1995 to 2005, portfolio liabilities to non-residents grew at 1.7% annually. The value of these liabilities increased from $422.9 billion to $502.2 billion.
The value of the stock of Canadian direct investment abroad has been on par with or exceeded the value of foreign direct investment in Canada since the mid-1990s.
In 1995, the stock of Canadian direct investment abroad was valued at about 96% of the stock foreign investment in Canada. In 2008, the value of Canadian direct investment abroad was 18% higher than the value of foreign direct investment in Canada. In 2010, the stocks of Canadian direct investment were 10% higher than those of foreign direct investment.