Canada’s “impressive” reduction of foreign indebtedness in recent years helped the country record a positive net international investment position for the first time at the end of the fourth quarter of 2008, according to a report by TD Economics released on Wednesday.

In the fourth quarter, Canada’s international investment position swung to a surplus of $13.5 billion. While the positive net position will likely be short-lived, Canada’s foreign indebtedness will not plunge to its earlier levels, says the report by TD economist Grant Bishop.

He says the shift towards a positive net position has been underway for some time, particularly since Canada began running current account surpluses in 1999. The surpluses allowed the federal government to pay down foreign debt and boost its holdings of foreign assets at a “breakneck pace.”

“Compared with other industrialized nations, Canada’s rapid reduction of its net debtor status is remarkable. It stands in contrast with the tumbles of the U.S. and U.K. into net debtor positions,” the report says.

The fourth-quarter swing into positive territory was largely a result of the depreciation of the Canadian dollar, according to Bishop.

Still, Canadians’ foreign assets increased by $158 billion in the fourth quarter, while liabilities to foreigners increased by $83 billion. Within the foreign assets, Canada’s direct investment abroad increased by $72 billion, or 12.3%, during the quarter.

In terms of securities flows, the market turmoil prompted Canadians to rapidly divest from foreign portfolio investments, shedding a record $21.2 billion of these investments during the fourth quarter. For 2008 overall, Canadians divested $13.8 billion from foreign portfolio assets.

Canadians were especially eager to liquidate foreign bonds in the fourth quarter, divesting a total of $11.6 billion, and U.S. government bonds in particular, of which $9.1 billion were liquidated.

But due to the effects of the declining loonie, Canadian portfolio investment abroad overall still increased by $36 billion during the fourth quarter.

Meanwhile, foreigners divested $4.1 billion in Canadian securities, including $1.5 billion of Canadian stocks and $12.7 billion in Canadian bonds, opting instead for safer investments. As a result, Canadian money market instruments were hot commodities among foreigners, with holdings rising by $9.8 billion over the quarter – the largest recorded quarterly purchase of Canadian short-term debt by foreigners.

Despite the divestment, the strong currency effects resulted in a $22 billion boost in foreigners’ overall portfolio investment in Canada.

TD Economics expects that Canada will revert to a negative net international investment position in the first quarter of 2009. As exports continue to fall, worsening the country’s trade deficit, TD projects that Canada’s current account balance will remain in deficit over the next five years.

In addition, the bank expects an appreciation of the Canadian dollar beginning in the second quarter, which will help drag down Canada’s net position.

Specifically, Bishop calls for Canada’s net international investment position to tumble to a $58-billion deficit by the fourth quarter of 2009. But still, he says the deficit position will be less severe than it’s been in the past.

“Even while Canada will revert into net debtor position, the decline will not be so precipitous as to return Canada to its earlier levels of net international indebtedness.”

IE