Balance of international payments

Fourth quarter 2002

The seasonally adjusted Current Account surplus fell $0.9 billion to $3.3 billion in the fourth quarter of 2002. The deficit in investment income widened as larger dividends were paid to foreign direct investors, and the surplus on goods declined because of lower exports of goods. However, the services deficit improved slightly. It was the first time since the fourth quarter of 1999 that the Current Account surplus was below the $4 billion level.

In 2002, the surplus in the Current Account fell to $17.3 billion from the record $30 billion in 2001. The goods surplus declined $9.8 billion on lower exports and higher imports of goods. Dividends received by Canadian direct investors on their foreign investments were lower by $2.3 billion compared to 2001.

In the capital and financial account (not seasonally adjusted), there were marked increases to both financial assets and financial liabilities leading to a net outflow on the quarter. For Canadian assets, direct investors led the way with their largest investment in the past six quarters. Canada's portfolio investors were less active in acquiring foreign securities-their 4th quarter investment was the lowest for the past three and a half years. The increase to financial liabilities was up strongly from a low level in the 3rd quarter. Foreign portfolio investors were the main contributors with a sizeable investment in Canadian debt securities, both money market securities and bonds. Foreign direct investment was up to a more moderate level after falling considerably in the 3rd quarter.

Current account

Lower exports brought goods surplus down

The goods surplus decreased $0.5 billion to $13.2 billion in the fourth quarter, as the value of exports fell and imports remained stable. A large drop in exports of automotive products, related to lower shipments of passenger cars was offset by an increase in the export of energy products due to higher prices for natural gas and a combination of higher volumes and higher prices for crude petroleum. Export prices for lumber continued to drop but the growth in volume was sufficient for a slight increase in exports. Imports of automotive products were down somewhat, as the increase for cars and trucks was more than offset by a reduction in the imports of parts. Energy product imports, particularly for crude petroleum, increased slightly. The deficits on goods trade with United Kingdom and with the non-OECD countries deteriorated because of higher imports from those regions.

For 2002, the goods balance was down from the record level of 2001. The largest decrease in exports was in machinery and equipment where exports of television, telecommunication and related equipment continued to decline and was half of the record value of 2000. Lower prices for natural gas and electricity led to declines in export values for these products while higher prices for crude petroleum raised the value of exports. Exports of automotive products increased and almost returning to levels registered in 1999 and 2000. Imports of machinery and equipment continued to decrease in 2002 but this was more than offset by higher imports of automotive products. Consumer goods imports recorded a significant increase during the year.

Lower deficit in services

The decline in the services deficit in the fourth quarter was evenly distributed between travel, transportation and commercial services. An increase in the number of foreign visitors to Canada had a positive effect on the travel deficit. The commercial services deficit improved as increases in exports outpaced imports. Higher receipts and lower payments were responsible for an improved transportation deficit. For the year, the lower deficit in commercial services was due mainly to larger exports of architectural, engineering and other technical services, and financial services. The travel deficit increased but was still the second lowest since 1987. In 2002, the travel deficit with countries other than the U.S. was the highest ever while the deficit with United States decreased significantly for a second year in a row.

More dividends paid to foreign direct investors

The deficit in investment income increased $0.7 billion to reach $8.4 billion, a level not reached since the end of 1999. While income receipts remained relatively stable in the fourth quarter, the payment of dividends to foreign direct investors increased by $0.6 billion. The increase was particularly significant in the energy and metallic minerals sector. On an annual basis, after two years of decrease, the investment income deficit was higher in 2002. Profits accruing to holders of foreign direct investment in Canada increased while the profits on Canadian direct investment abroad declined for the year.

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Capital and financial account

Canadian direct investment abroad ends the year with strong quarter

Canadian direct investors channeled $16.0 billion into foreign economies in the quarter, their strongest investment in a year and a half. Direct investment of $43.9 billion for the year was lower than both of 2000 and 2001, but only slightly below the average of the last five years. While the fourth quarter investment went mainly to the United States, the investment for all 2002 was widely spread geographically. For the four previous years though, just over half (57%) was invested in the American economy. In the 4th quarter most of the investment went to existing affiliates for working capital purposes with little to acquisitions, as was the case for 2002 in general -acquisitions had been the principal driver in three of the past four years. Industrially, the investment went largely to the financial and energy-metallic minerals industries in the quarter as it has for all of 2002.

Canadian demand for foreign securities falls again

Canadian demand for foreign securities fell for the third consecutive quarter. The net Canadian investment of $2.8 billion in foreign securities was the lowest quarterly investment in three and a half years.

The $2.7 billion invested in foreign equities was similar to the 3rd quarter, whereas the investment for all of 2002 represented about half that of 2001. The investment in the quarter went exclusively to US shares as Canadian investors sold overseas shares. For 2002, 90% of the $18.5 billion went to US shares, in contrast to the two previous years when just under half was invested in overseas equities. Canadian investment in foreign shares was led by pension and mutual funds-even though the Canadian mutual funds industry saw net redemptions in 2002.

While Canadian investment in foreign bonds remained unchanged in the 4th quarter, the $6.2 billion invested for 2002 was the highest in four years. For 2002, 65% went to US treasuries with the balance split between overseas and corporate US bonds.

Other investment assets

Other investment assets increased after two quarters of contraction. Increases to loan assets were largely responsible for the increase as Canadian banks boosted their Canadian dollar loans to non-affiliates. There were some offsetting flows including a small decrease in Canada's reserves for a second consecutive quarter.

The Canadian dollar closed the quarter at 63.39 US cents, little changed from its level of the 3rd quarter but up over half a cent for the year. However both the Canadian and US dollars lost considerably to all other major foreign currencies in 2002, most notably the Euro.

Moderate foreign direct investment flows into Canada

After a very low level in the 3rd quarter, foreign direct investment of $5.7 billion flowed into the Canadian economy in quarter four. Even with the slower investment in the second half, the total for 2002 was $33.6 billion, a level similar to three of the past four years. Industrially, the investment in the 4th quarter went to the other investment category, mainly communications. For the year just over half was invested in energy-metallic minerals industry with the remainder spread to several industries within the other category. Acquisitions played a role in the 4th quarter representing about a third of the total after being a non-factor in the 2nd and 3rd quarters. Geographically, most of the investment for the quarter and the year came from US investors; for 2002 one-quarter of direct investment came from Asian and European investors.

Largest quarterly investment of the year by foreign portfolio investors in Canadian securities

Foreign portfolio investors bounced back with their highest investment in a year-they invested $9.4 billion in Canadian securities after reducing their holdings in the 3rd quarter. The investment went mostly to debt securities however they did buy a modest amount of Canadian equities after a large divestment in the 3rd quarter.

Foreign investors bought $4.0 billion of Canadian money market paper over the quarter after having made virtually no investment over the first nine months of 2002. Half of the 4th quarter investment came from the Unites States where short-term interest rates have been steadily declining compared to those in Canada. The investment on the quarter went largely to federal government paper, both direct and federal enterprise, and some to corporate paper.

Foreign investors bought $3.7 billion worth of Canadian bonds bringing the total for 2002 to $15.8 billion. The annual foreign investment came almost exclusively from secondary market trading as the investment through the primary market (new issues less retirements) was low. Primary market activity did vary significantly by sector as the federal and municipal governments continue to pay down their foreign-held debt, while federal enterprises and corporations had significant net new issues in foreign markets. The record secondary market activity was 70% directed to federal bonds with most of the balance to federal enterprise and corporate bonds. Three-quarters of total foreign investment in Canadian bonds came from American investors with the balance from British investors.

With share prices picking up in the 4th quarter so too was foreign investment in Canadian equities. Foreign investors bought a modest $1.6 billion of Canadian shares in the quarter. The buying came exclusively from new share offerings in foreign markets and treasury shares issued to foreign investors for the purposes of mergers and acquisitions. While there was virtually no net secondary market activity, this was in contrast to the record selling of the 3rd quarter-that was influenced in part by a Standard and Poor's decision to drop five major Canadian companies from its S&P 500 index.

Other investment liabilities

Other investment liabilities increased by $1.1 billion during the quarter. Short-term loans (loans under repurchase agreements) again accounted for all the increase in the loans category.

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Tables

Balance of payments
Current account

Balance of payments

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Current account

Information on methods and data quality available in the Integrated Meta Data Base: 1533, 1534, 1535, 1536 and 1537.