While Canadian investment firms have reason to celebrate massive foreign inflows into Canada, they may represent an unsustainable crutch for the economy as a whole.
In an economic commentary, National Bank Senior Economist Krishen Rangasamy writes that Canada’s current account deficit for the second quarter stands at $19.86 billion, or roughly 4% of GDP, indicating the extent of Canada’s dependence on foreign capital.
“Even more concerning, however, this massive deficit is being financed by short-term capital. Indeed, portfolio inflows and foreign deposits are unstable (relative to foreign direct investment) because they have potential to quickly reverse,” Rangasamy explains. “The Canadian dollar is therefore highly vulnerable to a change in foreign investor sentiment.”
Another source of concern is the statistical discrepancy, an economic indicator of the inflow or outflow needed to balance the current and capital/financial accounts. Fundamentally speaking, it is a balancing figure that is used to measure money flow that is unaccounted for.
“The statistical discrepancy has now been positive, i.e. a source of financing, for an unprecedented five consecutive quarters,” reports Rangasamy, identifying the figure as “another layer of uncertainty to the loonie’s outlook.”
Foreign investments in Canadian securities have been largely attributed to a depressed global financial market. In particular, low-to-negative yields in global bonds have made Canadian bonds more attractive to investors searching for decent yields.
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