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Canada's balance of international payments

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The Daily

Wednesday, November 29, 2006
Third quarter 2006

Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, increased $0.4 billion in the third quarter to $5.1 billion. After four quarters of large fluctuations, the goods surplus remained little changed and the deficit on investment income fell as receipts increased.

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In the capital and financial account (not seasonally adjusted), Canada increased its international assets during the quarter mainly due to record acquisitions of foreign securities by portfolio investors. The largest investment by foreign direct investors in nearly six years pushed Canada's international liabilities up, partly offsetting the higher assets.

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 slightly

The surplus on trade in goods decreased $0.7 billion to $12.2 billion in the third quarter, the lowest level in more than three years. Exports rebounded to the first quarter level while imports continued to increase.

Exports rose $2.0 billion in the third quarter to $114.8 billion. Large increases in export prices of metals and alloys and, to a lesser extent, metal ores contributed to the $2.0 billion increase in the value of industrial goods exported. This was the seventh consecutive increase for this group of commodities.

Exports of aircraft, engines and parts rebounded $0.7 billion to $4.0 billion, their highest level since the beginning of 2003 but below the $5.4 billion peak recorded at the end of 2001.

These increases were partially offset by the third consecutive large drop in automotive products. All three major components (cars, trucks, and parts) declined during the quarter. During the last two quarters, automotive products have registered their lowest levels of export in eight years.

Exports of energy products, which have fluctuated widely during the past year, remained unchanged. This quarter, both prices and volumes showed only small changes.

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Imports increased $2.7 billion to a record $102.6 billion in the third quarter. Automotive products recorded the largest increase at $0.9 billion, with cars and trucks accounting for most of the rise.

Machinery and equipment imports rose $0.8 billion to $28.8 billion, continuing the upward trend that started in the first quarter of 2004.

Imports of energy products increased $0.3 billion to a record $9.7 billion. Higher imports of crude petroleum were mostly offset by lower imports of other energy products.

Deficit on investment income narrows

The deficit on investment income shrank $1.1 billion to $3.2 billion as profits earned by Canadian direct investors abroad reached $7.4 billion, the second highest level ever.

The $0.9 billion increase to profits from Canadian direct investment abroad was split between higher dividends and higher reinvested earnings. The metallic minerals and finance and insurance sectors recorded the highest increases in profits during the third quarter.

Interest on foreign bonds and money market instruments reached $1.5 billion, a 50% increase since the third quarter of 2005, as Canadian investors have rapidly increased their holdings of these instruments.

Profits on foreign direct investment in Canada remained stable in the third quarter. However, these Canadian firms declared lower dividends, thereby raising the level of retained earnings.

Services deficit up slightly again

The services deficit was little changed in the third quarter, increasing by $0.1 billion. Higher deficits in travel and in transportation were partially offset by a lower deficit for commercial services.

The travel deficit grew $0.3 billion to $1.9 billion as fewer Americans visited Canada and more Canadians, mostly those spending as least one night abroad, went to the United States.

The number of foreign travellers coming to Canada has dropped for the eighth consecutive quarter while the number of Canadian international travellers increased for the eighth consecutive quarter. The travel deficit has doubled during this period.

The commercial services deficit fell back to $0.8 billion after two quarters above $0.9 billion. This was due in large part to a lower deficit for financial services following high payments in the second quarter.

Financial account

Foreign direct investment in Canada surges on takeovers

Foreign direct investment in the Canadian economy rose nearly four-fold to $26.2 billion in the third quarter. This large investment came mainly on the strength of an acquisition of a major Canadian firm. Industrially, the investment went primarily into the energy and metallic minerals industry sector (81%). Geographically, the investment came mainly from British investors, with some investment also by American and other European investors.

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Direct investment abroad remains robust

At $10.6 billion, Canadian direct investors continued their strong investment into foreign economies, similar to their investment of the second quarter. The investment consisted mainly of injections of working capital and reinvested earnings as investment through acquisitions was about half the previous quarter. From an industry perspective, the investment was concentrated in two sectors: finance and insurance and energy and metallic minerals. As well, the direct investment was focused in two principal regions: Asian economies and the United States.

Record investment in foreign securities

Canadians purchased a record $21.3 billion of foreign securities over the third quarter, two-thirds were in debt securities. The first three quarters of 2006 have seen an astonishing $61.6 billion invested in foreign securities by Canadians, almost equal to the record annual investment in 2000 of $63.9 billion.

Canadian acquisitions of foreign bonds remained strong at $9.3 billion during the third quarter, following back-to-back record purchases. Over 80% went to buy non-US bonds in the third quarter, totalling $7.6 billion, another record. Just under half of the 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.

Canadians also bought a record $5.0 billion of foreign money market paper, more than double the previous high. Two-thirds of the acquisitions in the third quarter were in overseas paper with the remainder invested in US paper. Similar to "Maple" bonds, foreign paper denominated in Canadian dollars began gaining popularity with $4.2 billion purchased over the quarter. Of this amount, 85% was issued by European financial firms.

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While investment in foreign equities was lower than the first two quarters, the third quarter saw Canadian investors buy a significant $6.9 billion worth. This investment was equally split between US shares and overseas shares.

Low foreign investment in Canadian securities

Foreign portfolio investment in Canadian securities was a weak $1.2 billion in the quarter. The entire investment was in Canadian bonds as foreign investors sold roughly equal amounts of stocks and money market paper.

Foreign investors bought $3.5 billion of Canadian bonds after selling them over the four previous quarters. Foreign investments were mainly attracted to bonds issued by federal enterprises and other corporations, and mainly to new issues. Retirements led to foreign investors reducing their holdings of federal government bonds. By currency, non-residents bought $5 billion of Canadian bonds denominated in US-dollars but sold some in Canadian and other foreign currencies.

Foreign investors divested some of their holdings of money market paper following three quarters of strong purchases totalling $9.7 billion. Sales by non-residents in the third quarter totalled $1.2 billion and were in paper issued by governments, mainly federal enterprise paper. Geographically, the selling was by American and European investors.

After two strong quarters of foreign buying, investors sold back a small amount of their holdings of Canadian shares in the third quarter. They sold $1.1 billion worth of equities in the quarter following the acquisition of $17.1 billion over the two previous quarters.

Transactions in deposits, loans and reserves

The other investment account recorded a moderate net outflow of $4.1 billion. The flow was mostly related to increases in net deposits and other investment accounts while Canada's official international reserves saw virtually no change. The Canadian dollar closed the quarter at 89.5 US cents, little changed from the second quarter, when the dollar rose sharply against the US dollar. The dollar was mixed against most other major foreign currencies.

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 third 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 fourth quarter of 2006 will be released on March 1, 2007.

For general information, contact Client Services (613-951-1855; To enquire about the concepts, methods or data quality of this release, contact Arthur Berger (613-951-3619), Balance of Payments Division.

Tables. Table(s).