The Canadian economy is on an upward course, but a depreciating loonie won’t help concerns over investment spending.
Depreciating currency hurts business investment spending if a country has long-term debt issued in foreign currencies, reveals research by the Bank for International Settlements.
While that research covers emerging markets, “the same conclusion could apply to Canada,” says Krishen Rangasamy, senior economist at National Bank Financial, in an research note.
Rangasamy says that Canadian corporations are increasingly issuing new debt in foreign currencies to attract international investors. “Outstanding corporate bonds denominated in foreign currencies were larger than those denominated in Canadian dollars for the third consecutive year in 2016,” he says.
The result: corresponding interest payments increase, leaving less available cash for investment spending.
“A weakening loonie (courtesy of the Bank of Canada’s dovish tendencies) has made importing machinery more expensive, which explains perhaps the reluctance of Canadian firms to invest,” says Rangasamy.
Read the full BIS paper here.