Balance of international payments

Fourth quarter 2004

Highlights

Canada's current account surplus with the rest of the world declined $2.1 billion in the fourth quarter to $6.3 billion on a seasonally adjusted basis. This decline resulted from the second consecutive quarterly drop in the surplus for trade in goods as well as a higher deficit on investment income. For the year 2004, the current account surplus reached a record of $33.8 billion, $10.0 billion higher than 2003.

In the capital and financial account (not seasonally adjusted), growth in Canada’s foreign assets outpaced that in international liabilities. There was a moderate increase to direct investment assets and a record advance in Canadian portfolio holdings of foreign bonds. Canadian liabilities with the rest of the world grew due to foreign buying of portfolio stocks and bonds.

By the end of the fourth quarter, the Canadian dollar jumped nearly 4 cents against the US dollar, closing 2004 above 83 US cents. However, the Canadian dollar lost ground against other major currencies during the quarter.

Current account surplus down again

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Current account

Goods surplus falls

The surplus on trade in goods was $15.5 billion in the fourth quarter, down $1.1 billion from the third quarter. Exports decreased by $2.9 billion to $107.6 billion. The decline was spread over all the major categories of goods except energy products where price increases led to a gain.

Imports diminished by $1.8 billion to $92.1 billion. Energy prices were also responsible for higher imports for these products. However this was more than offset by larger drops for machinery and equipment products and automotive products.

For 2004 the goods surplus stood at $67.3 billion, the largest in three years. Both exports and imports reached record levels helped by larger values of trade in industrial goods. While two-thirds of the increase for exports came from transactions with the United States, only half of the variation for imports was related to that country, confirming the larger import share of other countries such as China.

Both goods and on non-goods contribute to the lower surplus

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Lower profits earned on direct investment abroad

In the fourth quarter, the deficit on investment income increased for the fourth consecutive quarter. The change came from the lower profits earned by Canadians on their direct investment abroad, following two strong quarters. Profits earned in the quarter decreased by $1.0 billion.

Payments on investment income have decreased slightly in the fourth quarter as lower payments were made on foreign-held Canadian bonds. As about half of these bonds have been issued in US dollars, the significant appreciation of the Canadian dollar against the US dollar over the last two years has led to a $1.0 billion reduction in interest paid this quarter compared to the payments at the end of 2002.

For the year, the deficit on investment income was reduced by $1.3 billion as receipts grew more than payments. The deficit was the lowest since 1992 and this only three years after registering a record deficit. In 2004, both profits earned abroad by Canadians and profits on foreign direct investment in Canada increased significantly over their 2003 levels.

Lower income from foreign operations leads to a higher income deficit

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Services remained stable

In the fourth quarter, the deficit on services remained unchanged at $2.6 billion. A lower deficit on commercial service transactions was offset by a higher deficit for travel. All of the change for travel came from higher payments. In the fourth quarter, the number of travellers who spent at least one night in Canada remained virtually unchanged while more Canadians travelled abroad, especially to the United States.

For the year, the deficit for services increased by $0.3 billion. Travel and commercial services contributed to this increase.

At $4.1 billion, the 2004 travel deficit surpassed the 2003 deficit which was, at that time, the highest in nine years. While lower revenues were almost entirely responsible for the larger deficit in 2003, payments in 2004 grew more than the rebound in revenues. Despite the strong Canadian dollar vis-à-vis the US dollar, spending by Canadian travellers grew almost twice as fast for overseas destinations as for travel to the United States.

Direct investment abroad moderates¹

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Financial account

Moderate increase in direct investment abroad

Canadian direct investors injected $8.3 billion into foreign economies during the quarter which was down significantly from the previous two quarters. For 2004 however, direct investment abroad was at its highest in four years. The annual total of $57.5 billion went in roughly equal measures to acquisitions and to increases in the working capital of foreign affiliates. Geographically, just over 70% of the year’s direct investment went to the United States while four-fifths was invested in just two broad industry groups: finance and insurance and energy and metallic minerals.

Record investment in foreign bonds¹

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Investment in foreign bonds soars

Canadian investment in foreign securities in the quarter was entirely in bonds as it has been for most of 2004. For the year, over 90% of the $16.2 billion invested by Canadians in foreign securities was in bonds.

Canadian investors made their highest-ever quarterly purchase of foreign bonds. The $6.4 billion purchase in the quarter went two-thirds to US corporate bonds with the remainder mostly in US treasuries. The investment for 2004 was by far the largest ever, almost doubling the previous high established in 2003. The annual investment of $15.1 billion was roughly split between US corporate bonds, overseas bonds and US treasuries.

Meanwhile, Canadian demand for foreign equities was negligible in quarter four. This capped the investment for 2004 at $1.1 billion, which was the lowest investment in foreign equities since the mid-1980's. This low net investment masked a shift in composition as Canadian investors bought US stocks ($7 billion) but sold-off overseas shares ($6 billion).

Repatriation of assets leads to withdrawal of FDIC

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Canadians repatriate assets held by foreign direct investors

Acquisitions were negative for the fourth time in the last five quarters leading to a net outflow from Canada on foreign direct investment. Negative acquisitions result when Canadians on balance repatriate companies from foreign investors. The $1.8 billion negative investment in the quarter pulled down the annual total to a modest $8.5 billion investment. For the year 2004, most of the investment came from reinvested earnings. Geographically, foreign direct investment in Canada rose from US and Asian investors but declined from EU investors. There were two large international mergers accounting for the EU reduction.

Canadian securities attract foreign buyers

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Robust foreign investment in Canadian securities

Foreign portfolio investors upped their holdings of Canadian securities by $14.8 billion in the quarter. Similar to the third quarter, foreign investors bought equal amounts of bonds and equities.

Two-thirds of the $7.3 billion investment in Canadian bonds in the quarter went to corporate bonds, an amount similar to the two previous quarters. Provincial government and federal enterprise bonds accounted for the remaining third. There was a foreign divestment in federal direct bonds as several foreign-currency issues tied to official reserves, matured. The quarter’s investment originated mostly from the United States. For the year as a whole, foreign investors picked up $20.2 billion in Canadian bonds; a substantial increase over the $7.0 billion purchased in 2003 but just half the high of 2001. Virtually all of the buying in 2004 came from US investors while on a currency basis, the year’s investment was roughly split between Canadian and US dollar denominated issues.

With share prices up over 6% in the quarter, foreign investors bought $7.1 billion of Canadian equities. Unlike the second and third quarters when special events were the principal reasons underlying foreign investment, the buying in the fourth quarter came mainly from trade in outstanding shares. American and British investors were responsible for the purchases in quarter four. For 2004, the $35.8 billion was a record investment by foreign investors with just over 40% from trading. There were a number of large deals throughout the year that led to a record level of money being raised on equity markets in Canada which attracted foreign investors. The year also witnessed the largest Canadian takeover of a foreign company in history, where new treasury shares were issued by the Canadian company.

In the market for short-term instruments, the seesaw pattern of investment continued as foreign investors bought a small $0.3 billion worth. Throughout 2004, foreign investors regularly sold their holdings of money market paper culminating in an overall reduction of $2.7 billion for the year. Every sector other than federal government enterprises experienced a decline. While Canadian short term rates remained relatively stable throughout the year, US rates increased markedly from their historic low recorded in January of 2004. The resulting differential between the two countries, while still favouring investment in Canada, fell to 0.28% in December, its lowest level in three years.

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Other investment

Similar to the third quarter, net transactions in the other investment account led to a capital outflow due to a reduction in other investment liabilities. All liabilities were reduced with deposits between Canadian banks and their foreign affiliates in foreign currencies leading the way.

On the asset side of the ledger, a large increase in deposit assets mostly in foreign currencies between related banks was more than offset by reductions in the other three asset categories. Specifically, there were large reductions to loans under repurchase agreements and the largest quarterly decrease in Canada’s international reserves in ten years.

The Canadian dollar continued to appreciate strongly against the US dollar in the fourth quarter which brought the gain for 2004 to almost 8%, closing the year at 83.19 US cents. It was the Canadian dollar’s third annual gain against its American counterpart. While the Canadian dollar lost ground vis-à-vis all other major currencies in quarter four, there was little change over 2004 against the euro, pound and Swiss franc.

Note to readers

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Statistical tables

• Balance of payments
• Current account

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