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U.S. dollarIan Waldie

A couple of weeks ago, we talked about how the influx of foreign capital into Canadian securities has been backstopping the Canadian dollar's march to parity. It turns out that, on closer inspection, it's doing a lot more than that - it may be bankrolling a big part of Canada's recovery.

National Bank Financial reports that the record net inflows of foreign investment in Canadian securities has provided billions in fresh capital to Canadian businesses, re-opened a dormant market abroad for much-needed provincial-government bond issues, and more than financed Canada's swollen current-account deficit.

DEFICIT? WHAT DEFICIT?

In looking at Canada's international balance-of-payments ledger, what jumps out at many observers is the country's first current-account deficit in 10 years - totalling $41-billion, or 2.7 per cent of gross domestic product, in 2009. But NBF senior economist Marc Pinsonneault pointed out that this was more than offset - indeed, dwarfed - by the massive surplus in portfolio investments coming into Canada.

Foreign portfolio investments (covering purchases of stocks, bonds and money-market instruments) totalled $109-billion last year, which was $101-billion more than the net purchases by Canadians of foreign portfolio assets. The net inflows represented a record 6.6 per cent of GDP - about two and a half times the size of the current-account shortfall.

"Financing the deficit was not a problem," Mr. Pinsonneault said in a report this week.

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A BOND BONANZA

Foreigners' appetite for Canadian securities also provided a vital avenue for both companies and provincial governments to raise funds through new bond issues - something both welcomed as they wrestled with the impact of the recession and credit crunch.

"Canadian entities in need of financing benefited greatly from this state of affairs," Mr. Pinsonneault wrote.

As money-hungry Canadian companies ramped up their net new bond issuance to $33.4-billion in 2009 - the highest amount in nearly a decade - foreign investors gobbled up a whopping 80 per cent of it.

Meanwhile, Canada's provinces - suddenly saddled with substantial budget deficits as a result of the recession and economic-stimulus efforts - were able to tap into the foreign enthusiasm by ramping up their bond issuance and placing much of the new product in foreign hands.

Net new issuance by provincial entities (including municipalities) hit $34.4-billion in 2009, the highest level in more than two decades. Foreigners stepped in to grab $13.1-billion of that, the first time in 13 years that the provinces recorded net sales of new issues abroad.

"Canadian provinces ... dared to sell net new bond issues abroad for the first time in a very long while," he said.

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