Balance of international payments

First quarter 2007

Balance of international payments note to readers

Highlights

Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, increased $1.9 billion in the first quarter of 2007 to $6.5 billion. The improvement was mostly the result of higher values for energy product exports.

Chart D.1 Current account surplus improves

In the capital and financial account (not seasonally adjusted), Canada’s international assets, led by record investment in foreign securities, grew faster than Canada’s international liabilities. The growth in international liabilities came in part from continuing heavy injections of capital into the Canadian economy by foreign direct investors.

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Current account

Goods surplus rises

The surplus on trade in goods increased $2.1 billion to $14.5 billion in the first quarter as exports outpaced imports.

Exports of goods rose $4.5 billion in the first quarter, with almost half of the increase coming from energy products. Exports of natural gas increased $1.2 billion as prices jumped almost 15% in the first quarter. This was the first significant increase in natural gas prices since the fourth quarter of 2005. Crude petroleum exports remained historically high near $10 billion for a fourth consecutive quarter.

Chart D.2 Energy products continue to drive the goods surplus

Strong demand from non-U.S. destinations continued to drive growth in exports of industrial materials, which were up $0.9 billion in the first quarter. Since the middle of 2003, exports of these products have increased by 60%, with exports to non-U.S. destinations more than doubling. The export growth for these products over the past few years is largely due to rising prices.

Aircraft and other transportation equipment led the $0.7 billion increase in machinery and equipment exports. Aircraft, engines and parts surpassed the $4 billion mark for the first time since the first quarter of 2003 but are still below the record of $5.4 billion registered at the end of 2001.

There was a $2.4 billion increase for imports of goods during the first quarter of 2007. Imports of consumer goods increased for a 9th consecutive quarter up $0.6 billion from the fourth quarter.

Imports of automotive products and industrial materials each increased by half a billion dollars in the first quarter. The increase in industrial materials was largely due to organic chemicals.

After an important drop in the fourth quarter of 2006, imports of crude petroleum remained stable while imports of other energy products increased $0.2 billion.

Chart D.3 Non-goods deficit slightly up

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Lower profits on direct investment

Lower profits on Canadian direct investment abroad were only partially offset by higher income from Canadian portfolio investment abroad, leading to a $0.7 billion increase in the deficit on investment income. Nonetheless, the $3.6 billion deficit is low relative to historical levels.

Chart D.4 Despite an increase, investment income deficit remains low

Profits on Canadian direct investment abroad decreased $1.8 billion in the first quarter after recording the highest level ever during the fourth quarter of 2006.

While dividend receipts on Canadian direct investment abroad returned to a more normal level in the first quarter, dividends and interest received by Canadian portfolio investors continued to increase reflecting high purchases of foreign securities in recent years. The combined receipts of interest and dividends on Canadian portfolio assets have increased $1.5 billion or 40% since the first quarter of 2006.

There was little change in payments of investment income which totalled $19.6 billion for the quarter. Profits earned in Canada by foreign direct investors remained little changed at $8.1 billion.

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Services deficit decreases slightly

The services deficit remained high by historical standards in the first quarter at $4.1 billion. This was down slightly from the $4.3 billion registered in the fourth quarter of 2006, as travel and commercial services deficits were both slightly reduced.

Travel and transportation services were the main contributors to the services deficit, with deficits in both categories just slightly below all time highs.

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Financial account

Demand for foreign securities shows no signs of slowdown

Canadians invested a record $25.8 billion in foreign securities during the first quarter with two-thirds in debt securities and the remainder in stocks. Investment in foreign bonds rose to a record $16.6 billion, fuelled by the high level of acquisitions of maple bonds. Canadians added $19.1 billion in U.S. corporate and overseas bonds to their portfolios but sold $2.5 billion worth of U.S. government bonds.

Chart D.5 Investment in foreign securities hits record high¹

Investment in foreign stocks remained robust at $8.9 billion. Two-thirds of the investment went to buy U.S. stocks ($6.1 billion). Of the amount invested in U.S. stocks, $2.2 billion was explained by takeover activities where U.S. firms acquired Canadian firms; the payment to Canadians included new U.S. shares in addition to cash.

Investment in foreign money market instruments was nominal at $232 million. During the quarter, Canadians rebalanced their holdings by disposing of holdings of U.S. paper ($624 million) and acquiring overseas paper ($855 million). During the first quarter of 2007, U.S. short-term rates lagged the corresponding European rates.

Maple bonds have been the driving force behind the investment in foreign securities over the last several quarters. The low cost of borrowing in Canada, the shrinking supply of Federal government debt and the elimination of foreign content limits for tax-deferred investment plans were all factors contributing to the development of this market in Canada. This new segment of the bond market, which has grown steadily since 2005, is not a unique phenomenon. Australia and Japan, for example, both have their so-called Kangaroo and Samurai bond markets where foreign borrowers issue bonds denominated in domestic currencies.

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Canadian direct investment abroad maintains recent pace

After investing on average $15.4 billion per quarter into foreign economies over the last three quarters, Canadian direct investors added another $12.9 billion in the first quarter. Although this represented the lowest level of investment in the last four quarters, direct investment abroad amounted to a sizeable $58.9 billion during this period. Most of the first quarter investment went to existing foreign affiliates.

Chart D.6 Direct investment abroad keeps growing¹

On a geographical basis, investments in the United States dominated ($10.3 billion) while Canadians repatriated $0.8 billion from their investments in the United Kingdom. From an industry perspective, the bulk of the investment ($10.0 billion) went to the energy and metallic mineral sector and the finance and insurance sector.

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Canadian natural resources sector continues to attract foreign direct investors

Foreign direct investment in Canada surpassed the $20 billion mark for the third consecutive quarter, demonstrating foreign investors’ continued high level of interest in the Canadian economy. The $20.3 billion investment in Canada by foreign direct investors was the fifth highest on record, the third and fourth highest being recorded in the second half of 2006. A significant two-thirds of the investment in Canada in the first quarter ($13.8 billion) was the result of acquisitions of Canadian firms by non-residents.

Chart D.7 Foreign direct investors demonstrate a high level of interest in the Canadian economy

Investment in the Canadian energy and metallic mineral sector remained the preferred investment of choice for foreign direct investors during the quarter. An amount of $11.2 billion was injected in this sector of the Canadian economy, pushing the total investment for this sector to $77.7 billion since the third quarter of 2005. Americans were the biggest foreign direct investors in Canada with $9.2 billion followed by European investors ($5.6 billion).

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Foreign portfolio investment in Canada increases due to investment in bonds

Foreign portfolio investors acquired $4.5 billion of Canadian securities in the first quarter, all in bonds. For Canadian bonds, most of the acquisitions were the result of net new issues totalling $2.9 billion. Canadian corporations were active and raised $3.4 billion in foreign markets (net of retirements).

Chart D.8 Non-residents invest in bonds but reduce their holdings of stocks

Non-residents saw a net reduction of $575 million of Canadian stocks from their portfolio in the first quarter. This was the result of a portfolio divestment of $3.0 billion due to foreign takeovers that more than offset a $2.4 billion investment in Canadian outstanding shares. The last quarter of 2006 had a similar pattern as non-residents acquired $3.6 billion of outstanding shares, which foreign takeovers more than offset, resulting in an overall divestment of $5.3 billion. The Standard and Poor’s / Toronto Stock Exchange composite index gained 2.0% during the quarter.

Non-residents reduced their holdings of Canadian money market paper by $702 million. The quarterly divestment focused on federal government paper, and was partly offset as non-residents increased their holdings of federal government enterprise paper. The differential between rates in the U.S. and Canada still favoured investment in the U.S., as it has since January 2005.

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Transactions in deposits, loans and reserves assets

On the asset side of Canada’s financial account, loans, deposits and foreign exchange reserves all showed strong increases totalling $20.5 billion for the quarter. This completely offset the $19.8 billion reduction in these assets in the fourth quarter of 2006. Canada’s international loans and deposit liabilities to non-residents followed a similar pattern. They increased by $22.9 billion in the first quarter after a decrease of $18.7 billion in the previous quarter. The Canadian dollar gained just under 1% on the U.S. dollar over the quarter to close at 86.6 U.S. cents.

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Revision to under reporting of non-U.S. exports

The existence of under reporting in the customs data for exports to non-U.S. destinations has been known for many years. A series of studies undertaken from the late 1990s into this century by the International Trade Division (ITD) of Statistics Canada in cooperation with the Canada Border Services Agency (CBSA - formerly Canada Customs) demonstrated that the under reporting had grown substantially. As a result, the Balance of Payments (BOP) adjustment for under reporting was significantly increased reaching a maximum of 24% of total non-U.S. exports in 2000.

Over the last few years CBSA and Statistics Canada (STC) have undertaken projects to improve the reporting of these transactions. STC and CBSA have jointly implemented a system of on line reporting that is available for non-U.S. exports and the utilization of this system has expanded rapidly since its introduction. In addition, CBSA has strengthened regulations that require goods to be declared prior to export and has increased its efforts to enforce the regulations, in part through the use of its administrative monetary penalty system (AMPS). In addition, CBSA has entered into agreements with most large marine and air carriers whereby the carriers will not load the cargo unless the proper documentation has been filed by the exporter.

A study conducted in the fall of 2006 indicated that these compliance efforts have been successful and that under reporting has decreased. Therefore, with this annual revision, the BOP adjustment for under reporting of exports to non-U.S. destinations has been reduced to reflect this improved reporting. Specifically, the BOP adjustment has been reduced by $500 million in 2004, $1.5 billion in 2005 and by $2.5 billion in 2006. The estimate for under reporting is now 15% of total exports to non-U.S. countries, down from 24% in 2000.

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Statistical tables

• Table D.1 Balance of payments
• Table D.2 Current account

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