Foreign direct investment in Canada plunges on oil exodus

By Theophilos Argitis on 3/1/2018

OTTAWA (Bloomberg) -- Foreign direct investment into Canada plunged last year to the lowest since 2010, hampered by an exodus of capital from the nation’s oil sector and worries about the fate of the North American Free Trade Agreement.

Direct investment dropped 26% in 2017 to C$33.8 billion, Statistics Canada reported Thursday in Ottawa. Capital flows dropped for a second year, and are down by more than half since 2015.

The decline underscores how the impact of the energy slump continues to linger through a Canadian economy that last year also began to face the additional headwind of growing protectionism in the U.S.

The numbers are also a setback for Prime Minister Justin Trudeau’s Liberal government, which has put an emphasis on attracting foreign companies to invest in Canada.

The foreign direct investment in Canada last year was largely reinvested earnings of existing businesses.

Falling foreign direct investment is important. The country’s economy has relied heavily on foreign funding since the global recession -- totaling more than C$500 billion since 2008 and about C$130 billion over the past two years alone, according to balance of payment data.

Unlike portfolio investment, foreign direct investment is considered a stable source of funding that comes with the additional benefits of a transfer of know-how. Instead, an increasing amount of Canada’s funding needs are being met by short-term funds denominated in foreign currencies -- which makes the country more vulnerable to a sudden withdrawal of foreign investment.

Balance of Payments

Canada’s current account deficit -- what it needs to borrow from the rest of the world to finance spending -- narrowed in the fourth quarter to C$16.3 billion from C$18.6 billion in the third quarter. The current account gap for all of 2017 fell to C$63.9 billion, from C$65.4 billion in 2016.

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