Balance of international payments

Third quarter 2005

Note to readers

Highlights

Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, increased $4.4 billion in the third quarter of 2005 to $9.3 billion. A spike in energy prices led to record export values for energy products, which were the major contributors to the third largest surplus ever.

The capital and financial account (not seasonally adjusted) produced a net outflow; however it was less than those of the previous two quarters. Growth in Canada’s international assets came from both portfolio and direct investors. In the meantime, Canadian liabilities to the rest of the world grew strongly as foreign direct investment in the Canadian economy was at a three-and-a-half year high.

Strong increase in the current account surplus

Current account

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Goods surplus up sharply

The surplus on trade in goods rose by a record $5.2 billion to $18.8 billion in the third quarter as the value of energy exports reached its highest level ever. Both total exports and imports hit record levels during the quarter.

Led by record transactions in energy products, exports of goods were a record $116.2 billion, surpassing the previous high of $112.5 billion in the fourth quarter of 2000.

Higher prices push up exports of energy products

Higher prices were evident across all the major categories of energy products. The largest gain was in natural gas where seasonally adjusted prices increased by more than 30% in the third quarter. Most of that increase occurred in September following Hurricane Katrina.

Exports of automotive products rebounded after four consecutive quarters of decline while lower prices pushed down the value of forestry product exports.

Imports increased $1.1 billion in the third quarter to reach a record level for the third consecutive quarter. Like exports, imports of energy products increased because of higher prices. Automotive product imports, particularly vehicle parts, also increased in the third quarter.

Growth in goods surplus outpaces all other changes

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Deficit on investment income widened

The deficit on investment income increased $1.0 billion to $6.1 billion. This followed a revised deficit of $5.1 billion in the second quarter which was the lowest in almost 14 years.

Profits earned by foreign direct investors in Canada reached a record $8.2 billion in the third quarter helped by high profits in the energy sector and in the transportation equipment sector.

Portfolio interest payments on Canadian bonds decreased slightly in the third quarter. While payments on corporate debt, mainly issued in US dollars, have remained stable since the beginning of 2003, there has been a slow but gradual drop in interest paid on government debt.

Revenue on Canadian assets decreased somewhat but remained high historically. Interest received on foreign portfolio bonds has doubled since the first quarter of 2004 and reached $0.9 billion in the third quarter as Canadians have significantly increased their ownership of such securities over the last two years.

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Lower services deficit

The lower deficit on trade in services in the third quarter was explained by smaller deficits for both travel and transportation while the balance on commercial services remained unchanged.

Expenses of Canadian travellers in countries other than the United States dropped 5% in the third quarter, the largest reduction since the second quarter of 2003 which was affected by the SARS crisis.

U.S. residents continued to reduce their spending in Canada as the number of visitors has decreased for a third consecutive quarter.

Both exports and imports of commercial services remained virtually unchanged in the third quarter as fluctuations of the components were offsetting.

Financial account

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Canadian appetite for foreign securities continues to grow

During the third quarter, Canadians invested $16.8 billion in foreign securities, exceeding the total invested over the previous two quarters. This was the highest quarterly investment in foreign securities in almost five years.

Most of the investment flowed into foreign bonds as Canadians acquired a quarterly-record $10 billion. Canadians bought overseas bonds, US treasury bonds and US corporate bonds in roughly equal measures. About four-tenths of this value resulted from foreign firms coming to the Canadian market to sell new bonds. These foreign bonds were denominated in Canadian dollars and, in general, were sold to institutional buyers.

Of the $6.2 billion invested in foreign stocks over the quarter, almost all went into US shares with just $787 million going into overseas equities. Moreover, this was the strongest quarterly investment in foreign stocks in nearly four years. In addition, Canadian investors purchased $597 million of foreign money market paper: they bought US government treasury bills but sold some of their holdings of overseas paper.

Strong Canadian demand for foreign securities¹

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Direct investment abroad posts increase

At $11.8 billion in the third quarter, Canadian direct investment abroad was up by over half from the previous quarter. The investment for the quarter came from increases to working capital and acquisitions of foreign firms. From an industry perspective, investment was concentrated in the finance and insurance and the energy and metallic minerals sectors. Four-fifths of the investment went to the United States and Asian economies.

Canadian direct investment up over half¹

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Big rebound in foreign direct investment in Canada

Foreign direct investment of $13.7 billion was injected into the Canadian economy during the quarter, almost triple what came in during the second quarter. Almost half was fuelled by acquisitions which have rebounded this year following two years of negative acquisitions. In 2003 and 2004, Canadians repatriated some firms from their foreign direct investors. For the quarter, about 70% of the investment came from the United States while an identical percentage was invested in companies in the energy and metallic minerals sector.

Acquisitions fuel increase to direct investment in Canada

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Foreign investment in Canadian securities moves to equities

Foreign investors bought $7.6 billion worth of Canadian equities but sold debt securities worth $1.9 billion over the quarter. The resulting $5.6 billion foreign investment in Canadian securities brought the year-to-date investment to $7.3 billion. This year’s investment in Canadian securities is on track to be the lowest since 1999.

The third quarter saw the largest foreign investment in Canadian stocks of 2005. About three-quarters came from American investors. Over the quarter, Canadian stock prices increased 11% with non-residents continuing to invest heavily in shares of Canadian resource firms.

Foreign investors sold $1.6 billion of Canadian money market paper and a further $330 million of Canadian bonds in the third quarter, more than offsetting the acquisitions of the previous quarter.

Foreign investors buy Canadian shares

The foreign divestment of Canadian money market paper in the third quarter was mostly in paper issued by federal enterprises. Overall, American and British investors were the main sellers, however there was some offset as Asian investors (excluding Japanese investors) continued to buy Canadian paper over the quarter. For the year-to-date, there has been a large foreign divestment of $2.6 billion in Canadian paper; however, Asian investors have bucked the trend by accumulating $1 billion worth. At the same time, the difference in short term rates in North America has swung over to favouring investing in US over Canadian paper. This had grown to just over half of a percentage point by the end of the third quarter.

Over the first three quarters of 2005, there was little net activity in foreign investment in Canadian bonds. Foreign investors bought only $803 million over the first half of the year then sold $330 million worth of their Canadian bond holdings in the third quarter. However, on a currency basis the third quarter saw some important shifts in composition. Foreign investors bought $3.5 billion worth of Canadian bonds denominated in Canadian dollars, while reducing holdings of bonds denominated in foreign currencies by $3.9 billion. The divestment in the third quarter came wholly from European investors but, similar to the money market, this was partly offset by purchases from Asian investors (excluding Japanese investors).

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Large transactions in deposits and loans

The other investment account recorded a net inflow of $3.8 billion similar to the previous quarter, led by transactions of banks. With a record amount, non-residents increased their deposits ($24.7 billion) into Canadian banks while residents raised their deposits abroad by near record levels ($14.4 billion). In both cases, large transactions were recorded between Canadian banks and their foreign affiliates, mostly in foreign currencies. Canadians strongly reduced their loan liabilities after two quarters of accumulation, partly offsetting some of the large inflows from deposits. At the same time, Canada’s international reserves were reduced for a second quarter in a row.

The Canadian dollar gained 5.4 % against the US dollar over the quarter, bringing to a halt two quarters of decline. The dollar gained more than four cents to close at 86.01 US cents. The Canadian dollar recorded a third consecutive quarter of strong gains against other major currencies.

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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.