Canada's balance of international payments

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The current account balance with the rest of the world (on a seasonally-adjusted basis) was a deficit of $7.5 billion in the fourth quarter of 2008, the first since the second quarter of 1999. The swing to deficit in the quarter was driven by a lower surplus for trade in goods. This primarily reflected the continued weakening of export volumes compounded by substantial declines in export commodity prices in the fourth quarter, especially pronounced for most energy products. Deterioration in the investment income deficit was also a contributing factor.

Chart 1

In the capital and financial account (unadjusted for seasonal variation), Canadians repatriated funds in the fourth quarter of 2008, as investors reduced their holdings of foreign securities by a record amount. Both inward and outward foreign direct investment activity was down, reflecting worldwide economic and credit conditions.

Current account

Lowest goods surplus in almost 15 years, as most energy prices decline sharply

In the fourth quarter of 2008, the goods surplus dropped $10.6 billion to $3.7 billion, its lowest level since the first quarter of 1994.

The value of goods exported fell $12.6 billion during the fourth quarter. This followed advances in the first three quarters that were supported by strong price gains (driven by energy) in the first half of the year, despite declining export volumes. The largest export declines in the fourth quarter were in energy products (-26.6%) and were entirely due to much lower prices for most products, as volumes advanced.

Industrial goods exports were down $4.0 billion through a combination of lower volumes and lower prices in the fourth quarter. The reduction in volume was widespread, with copper and nickel (including ores and alloys) registering the largest price reductions. Exports of automotive products resumed their downward trend. However, machinery and equipment exports improved further, led by higher prices for aircraft and for other machinery and equipment.

The value of imported goods fell back $2.0 billion in the fourth quarter, with energy prices also a major factor. Energy product imports declined 16.7%, despite higher volumes. Imports of automotive products reached their lowest level in more than 10 years, with more than two-thirds of the decline in passenger autos. Price increases led imports of machinery and equipment to a high, despite generally lower volumes.

Chart 2

Investment income deficit widens on portfolio investment

The investment income deficit increased $0.8 billion in the fourth quarter of 2008, as portfolio investment receipts were down and portfolio investment payments were up. Lower holdings of and yields on foreign debt securities led to a $0.5 billion reduction in the interest received by Canadians. However, interest paid on Canadian bonds increased $0.4 billion. This increase was focussed in US dollar-denominated corporate bonds and reflected the substantial depreciation (-14%) of the Canadian dollar vis-à-vis the US dollar in the quarter.

Income from subsidiaries of both Canadian and foreign direct investors were down in the fourth quarter, in line with sagging corporate profits, especially in the energy sector.

Services deficit edges up, reflecting travel and commercial services activity

Larger commercial service payments, partially offset by higher travel receipts, led to a slight increase in the services deficit during the fourth quarter.

As the Canadian dollar lost value against the US dollar during the fourth quarter, spending by Canadian travellers fell for US destinations but increased for overseas destinations. Both receipts from US and overseas travellers improved slightly in the fourth quarter, with more US spending in Canada than in any other quarter of 2008.

Capital and financial account

Canadian investors shed foreign securities

In the context of turmoil in global financial markets and a sharp depreciation of the Canadian dollar, Canadian investors removed an unprecedented amount of foreign securities from their portfolios in the fourth quarter. This divestment reached $21.2 billion in debt and equity instruments, and marked the end of 29 years of net investment in foreign securities by Canadians.

Chart 3

Canadians continued to reduce their holdings of foreign debt instruments over the fourth quarter, a trend that began in August of 2007. The fourth quarter of 2008 marked a divestment of $15.5 billion, largely foreign bonds. In addition, investors sold foreign equities in the quarter for the first time in nearly six years. Most of the divestment in foreign securities occurred in October when global stock markets recorded substantial losses. Canadian holdings of foreign equities were further reduced in the quarter by significant unrealized capital losses.

Canadian direct investment abroad weakens

Canadian direct investment abroad increased $11.6 billion. While relatively strong, this was about half the level of investment in the previous quarter. Takeover activity remained modest in the fourth quarter, with outflows mainly comprised of funds placed in existing foreign subsidiaries. Over 80% of the investment was directed to the US economy, and nearly three-quarters in the energy and financial sectors. This capped a year of robust Canadian direct investment abroad.

Foreign direct investment in Canada also moderates

Foreign direct investment in Canada was at a similar level to Canadian direct investment abroad. Inflows slowed to $10.0 billion in the fourth quarter, as Canadian corporate earnings and equity values fell. Inflows were equally split between acquisitions and other flows. For a second straight quarter, foreign direct investment was concentrated in the Canadian energy and metallic mineral sector with investments of $6.3 billion as energy prices dropped significantly. Direct investment into Canada in 2008 was less than half of the level reached in 2007.

Non-residents adjust their portfolios of Canadian securities

Foreign investors removed $4.1 billion from their holdings of Canadian securities in the fourth quarter, in particular bonds. Divestment of $12.5 billion in Canadian bonds was the highest observed since the third quarter of 2003, and was attributable to retirements of federal and private corporate bonds.

Chart 4

Non-residents adjusted their portfolios significantly in favour of more liquid investments in the Canadian money market, as the Canadian dollar depreciated and the differential on short-term rates between Canada and the US moved substantially in favour of investment in Canada. Foreign purchases of Canadian short-term paper reached a high of $9.9 billion, mainly federal and federal enterprise issues. This may have also reflected the large supply of Canadian Treasury bills in the fourth quarter.

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 fourth quarter 2008 issue of Canada's Balance of International Payments (67-001-XWE, free) will be available soon.

The balance of international payments data for the first quarter of 2009 will be released on May 29.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Client Services (613-951-1855; infobalance@statcan.gc.ca), Balance of Payments Division.