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Canada's balance of international payments

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The Daily

Wednesday, August 30, 2006
Second quarter 2006

Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, decreased $4.0 billion in the second quarter  to $4.2 billion. This was the second consecutive important decrease in the surplus after it had reached a peak at the end of 2005. As in the previous quarter, most of the decline came from a lower surplus on trade in goods.

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In the capital and financial account (not seasonally adjusted), Canada's international assets and liabilities grew strongly in roughly equal measures for a second consecutive quarter. The increase to Canada's foreign assets came, in part, from near record acquisitions by portfolio investors.

Note to readers

The balance of payments covers all economic transactions between Canadian residents and non-residents. It includes the current account and the capital and financial account.

The current account covers transactions on goods, services, investment income and current transfers. Transactions in exports and interest income are examples of receipts, while imports and interest expense are payments. The balance from these transactions determines if Canada's current account is in surplus or deficit.

The capital and financial account is mainly composed of transactions in financial instruments. Financial assets and liabilities with non-residents are presented under three functional classes: direct investment, portfolio investment and other investment. These investments belong either to Canadian residents (Canadian assets) or to foreign residents (Canadian liabilities). Transactions resulting in a capital inflow are presented as positive values while capital outflows from Canada are shown as negative values.

A current account surplus or deficit should correspond to an equivalent outflow or inflow in the capital and financial account. In other words, the two accounts should add to zero. In fact, as data are compiled from multiple sources, the two balance of payments accounts rarely equate. As a result, the statistical discrepancy is the net unobserved inflow or outflow needed to balance the accounts.

Current account

Goods surplus falls again

The surplus on trade in goods decreased $3.8 billion to $12.8 billion in the second quarter, following a similar reduction in the first quarter. While the first quarter saw imports and exports decline, second quarter exports continued to decline while imports rebounded.

Exports shrank $2.0 billion to $112.5 billion while imports rose $1.8 billion to a record $99.7 billion.

The value of energy product exports improved somewhat in the second quarter, following a drop of $4.5 billion in the previous quarter. While prices of natural gas continued to diminish, prices of crude petroleum rose by more than 20% during the quarter, notably due to much higher prices for heavy crude petroleum, which accounted for roughly two-thirds of the total export volume.

Lower exports of cars during the second quarter resulted in a $1.7 billion reduction in exports of automotive products. This was the lowest level of exports for this group of products since 1998.

Machinery and equipment exports fell $0.8 billion during the quarter, the drop being spread among most of the components, while forestry products continued their downward trend which started two years ago. These decreases were partly offset by an improved performance for industrial goods, notably metal and alloys products.

Imports of energy products rose $1.8 billion in the second quarter. Crude petroleum accounted for most of the rise as both prices and volumes went up while petroleum and coal products also registered a significant increase.

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Deficit on investment income widens

The deficit on investment income increased $0.4 billion to $4.4 billion. Despite a second consecutive increase, the deficit remained low on an historical basis.

Profits earned by non-residents on their direct investments in Canada remained relatively stable in the second quarter. However, the dividends paid declined to more normal levels after two consecutive quarters above the $5 billion level. At the same time, the profits earned by Canadian direct investors went down $0.8 billion.

Receipts of interest on foreign bonds and money market instruments increased for the ninth consecutive quarter as Canadians continued to augment their holdings of such securities. Payments of interest on Canadian portfolio liabilities remained low, as lower payments on bonds were partly offset by higher transactions related to money market instruments.

Services deficit up slightly again

The services deficit increased $0.3 billion during the second quarter to $4.5 billion, another record. Higher payments for transportation services were the main contributor to the increase with the travel deficit remaining high. Both commercial service exports and imports registered similar increases and the deficit stayed at $0.8 billion.

Canadian travellers have again increased their international payments in the second quarter, notably in countries other than the United States. However, for the first quarter since the end of 2004, there was an increase in spending by US travellers in Canada.

While the total number of travellers from the United States coming to Canada decreased slightly in the second quarter, there were a larger number of people staying at least one night in the country. On average, this group of travellers stay three to four days in the country and spend eight times more than same-day travellers.

Financial account

Near record investment in foreign securities

Canadians purchased $18.8 billion of foreign securities in the second quarter, consisting of bonds and equities. Together with the record first quarter buying, Canadians have invested $38.7 billion in foreign securities during the first six months of the year, already over 60% of the record total for 2000.

Two-thirds of the $18.8 billion investment was in foreign bonds, a record high for a second straight quarter. The investment in foreign bonds was roughly split between US corporate bonds and overseas bonds. Canadian investment in US treasuries was little changed after 10 quarters of investment. Similar to the first quarter, some of the Canadian investment was channelled into "maple bonds". Foreign issuers have been marketing their debt in Canada for some time now. Typically, the bonds are denominated in Canadian dollars and sold to institutional investors.

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The second quarter saw Canadian investors again buy large amounts of foreign equities, totalling $7.6 billion. Canadian pension funds have been particularly active in acquiring foreign shares. Just over half of the total was in US shares with the remainder in overseas equities. At the same time, Canadian investors sold back the $1.1 billion worth of foreign money market paper they acquired in the first quarter. During the second quarter, investors bought $1.6 billion of US paper but sold $2.8 billion of overseas paper.

Direct investment abroad up strongly after a low first quarter

An $11 billion injection into foreign economies by Canadian direct investors was a return to a more usual level of investment comparable to those observed over the last few years. The first quarter investment of $7.3 billion was the lowest quarterly amount in two years. Most of the investments in the current quarter were injections of working capital into existing foreign affiliates. From an industry perspective, investment was concentrated in the finance and insurance sector. Direct investment abroad was well spread geographically, led by investment in Europe.

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Foreign direct investment lower in Canada after three strong quarters

In the second quarter, foreign direct investors injected $8.4 billion into the Canadian economy, down from the average of $14.4 billion of the past three quarters. The foreign investment was split between acquisitions, advances of working capital and strong reinvested earnings. While there have been a number of announcements of major foreign acquisitions during the second quarter, many of these have not formally closed. Much of the second quarter investment came from American investors and was widely spread by industry.

Strongest foreign investment in Canadian securities in six quarters

Foreign portfolio investment strengthened in the current quarter as investors bought equities and money market paper. They bought $10.4 billion worth of Canadian securities in the quarter, which exceeded investment for all of 2005.

Foreign investors bought $9.1 billion worth of equities during the quarter — despite a falling S&P/TSX composite index. The investment came largely from the United States, while investment from British investors was offset by sales of other European investors.

Biggest quarterly foreign investment in Canadian paper since 1997

Foreign investors made a significant investment in Canadian money market paper for a third consecutive quarter. They bought $4.6 billion worth of Canadian money market paper after buying a similar amount in the two previous quarters. Over half of the investment went to paper issued by federal enterprises with the remainder spread between corporate and government paper. Regionally, investors out of the United States and United Kingdom led the buying. Short-term rates continued upward in the United States and in Canada, with the differential favouring investment in the United States narrowing to just under one-half of a percentage point.

Non-residents continued to sell Canadian bonds for a fourth straight quarter. The foreign divestment of $3.2 billion in the second quarter was the largest of the four quarters, which have totalled $8.9 billion. In the second quarter, they sold federal government and corporate bonds but bought some bonds issued by federal enterprises. Regionally, the divestment came mainly from the United States and emerging economies, countered by some buying from European investors. On a currency basis, the foreign selling was largely in Canadian bonds denominated in US dollars. However, there were purchases of bonds denominated in other foreign currencies.

Transactions in deposits, loans and reserves

The other investment account recorded a large net inflow of $13.8 billion. The inflow was mostly related to higher deposit liabilities and secondly loan liabilities. Deposits and loans also increased strongly on the asset side, partly offsetting the increased liabilities. The Canadian dollar jumped four full cents during the quarter to close at 89.6 US cents against its American counterpart. The Canadian dollar declined somewhat against most other major foreign currencies except the yen.

Available on CANSIM: tables 376-0001 to 376-0017 and 376-0035.

Definitions, data sources and methods: survey numbers, including related surveys, 1534, 1535, 1536 and 1537.

The second quarter 2006 issue of Canada's Balance of International Payments (67-001-XIE, free) will be available soon.

The balance of international payments data for the third quarter will be released on November 29.

For general information, contact Client Services (613-951-1855; To enquire about the concepts, methods or data quality of this release, contact Arthur Ridgeway (613-951-8907), Balance of Payments Division.

Tables. Table(s).