Latest Developments in the Canadian Economic Accounts
Revisions to Canada's Balance of International Payments Latest Developments in the Canadian Economic Accounts
Revisions to Canada's Balance of International Payments

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Revisions to the Balance of Payments Account (BOP) introduced as part of the 2015 Comprehensive Revision of the Canadian System of Macroeconomic Accounts (CSMA) reflect statistical, classification, conceptual and presentational changes. This exercise was conducted to strengthen the overall quality of the international accounts and to introduce new concepts and classifications as recommended by updated international standards—for BOP the IMF Balance of Payments and International Investment Position Manual, 6th edition (BPM6) and the OECD Benchmark Definition of Foreign Direct Investment (BD4). As is always the case, revisions were harmonized with those of the corresponding accounts in the CSMA.

The most important changes are in the financial account of the BOP, which are discussed first. The current account of the BOP had seen major changes implemented regarding updated international standards as part of the 2012 Comprehensive Revision exercise.

1. Financial Account

Revisions to the financial account of the balance of payments are explained by the integration of new statistical information, mainly information coming from new benchmark surveys, as well as the implementation of new international standards. In addition, new details for some components of the financial account were also introduced.

Revisions, more important from 2007 onward, generally tend to decrease the net lending of funds or increase the net borrowing of funds over the period. These revisions are consistent with those applied to the current account and current account balance during the period.

Statistical revisions

Revisions to the financial account are related to the integration of new benchmark survey results which mainly affected the direct and portfolio investment functional categories. Another main contributor to the revisions to the financial account is the improved coverage of covered bonds and their reclassification from the other investment category (currency and deposit liabilities) to the portfolio investment category (Canadian bonds) of the financial account. Covered bonds are debt instruments generally issued by a financial institution and secured by a segregated pool of high quality assets. Given their characteristics, they are more properly classified in the portfolio investment functional category of the international accounts.

More detailed information on the geographical allocation of these issuances and their characteristics was available which enabled an improvement to the quality of the estimates recorded in the financial account and the overall international accounts for these instruments. Transactions (financial account), positions (International Investment Position – IIP) and investment income (current account) related to covered bonds are now generated on a security-by-security basis and are fully consistent in the international accounts.

Classification changes

In addition to the reclassification of covered bonds, more detailed information and new data series related to most of the functional categories of the financial account are also released as part of the 2015 Comprehensive Revision of the CSMA, improving the overall relevance of the international accounts and corresponding compliance with international standards.

Additional details are available for Foreign Direct Investment, Official International Reserves and Other Investment in the financial account.

For the Official International Reserves functional category, reserves in the form of securities are now available from 2007. These instruments were amalgamated with foreign currency and deposits previously. A large proportion of Canada's international reserves are in the form of foreign securities and showing these instruments separately from the rest of the currency and deposits provides additional information on the characteristics and exposure of Canada's international reserve assets.

For the Foreign Direct Investment (FDI) functional category, two major changes are introduced. First, FDI flows are now presented by type of instruments (equity other than reinvested earnings, reinvested earnings and debt instruments) as opposed to a total before. This additional detail provides users with more relevant information on the nature of the FDI activity on a quarterly basis. It also enables Statistics Canada to increase its compliance with international standards and to improve the international comparability of FDI information with other countries.

Second, the financial account main presentation has been modified to show FDI data on the asset-liability principle basis (i.e., gross basis) as opposed to a directional principle (i.e., net basis) as had been the case historically in the BOP. The difference between the two FDI conceptual presentations resides in the classification of reverse investment such as (1) Canadian affiliates' claims on foreign parents and (2) Canadian parents' liabilities to foreign affiliates. Under the asset/liability presentation, (1) is classified as an asset and included in Direct Investment Assets and (2) is classified as a liability and included in Direct Investment Liability^{Note 1}. New terminology was introduced to represent this concept: Canadian direct investment abroad is now referred to as Direct investment assets in the new presentation while Foreign direct investment in Canada was renamed to Direct investment liabilities.

A new CANSIM table illustrating the conversion of FDI transactions from the directional presentation to the asset liability presentation was created. This supplementary information was developed to help users better understand the differences between the current and the former presentations as well as to link to the time series based on the FDI directional principle. It has to be noted that Canada's annual detailed Foreign Direct Investment program presenting the stock of inward and outward direct investment by country and industry still remains on a directional presentation. The directional principle remains the measure used in the supplementary CANSIM tables showing quarterly direct investment flows by type of transactions and by industry.

The change from the directional to asset liability presentation also has an impact on the value of the aggregates net acquisition of financial assets and net incurrence of liabilities in the financial account. However, this classification change does not affect the value of the net lending/borrowing of the financial account.

For the Other Investment functional category, estimates of trade credit and advances are now identified separately in the financial account as required by international standards. Trade credit and advances arise when payment for goods or services is not made at the same time as the change in ownership of a good or provision of a service. Previously, these instruments were amalgamated with other types of instruments classified in the other investment category. Showing this type of financial instrument separately provides additional insight on the financing of goods and services.

2. Current account

Revisions to Canada's current account mainly reflect the integration of new statistical information and changes in classification. Over the period, revisions generally result in a deterioration of Canada's current account balance and are more important from 2012 onward.

Statistical revisions

The major factors explaining the revisions to the current account are the integration of new benchmark information from annual surveys and administrative sources. These factors explain most of the revisions to trade in goods and services as well as to income on foreign direct investment, which led the changes to the current account balance.  In addition, trade estimates were impacted by coherence with the Supply-Use tables in the integrated system of accounts.

Another contributing factor to current account revisions, from 2008 onward, resides in the integration of Government Finance Statistics (GFS) information on current government transfers. Current transfers for the government sector are now fully consistent with the GFS data and presented on an accrual basis in the balance of payments. The level of transfers was revised for both receipts and payments. The allocation of payment transfers by sector was also improved through this benchmarking exercise, with a higher share being allocated to the private sector as opposed to the government sector. This new information more properly reflects Canada's international activities in this area and illustrates better the role of the private sector in the transmission of these transfers to non-residents.

Classification changes

The current account is also revised due to the improved coverage and the reclassification of covered bonds (see write up in the financial account section with respect to transactions). As a result of this reclassification, interest paid by Canadian issuers to non-resident investors on their holdings of these securities are now reflected in the portfolio investment income category of the current account instead of the other investment category. In addition to the reclassification, the quality of these estimates has been improved with income on these instruments now being generated on a security-by-security basis. Overall, this new methodology resulted in higher payments recorded in the current account over the period 2007 onward.

3. Capital account

Statistical revisions

A review of the transactions recorded as capital transfers in the capital account of the BOP was undertaken—more specifically, transactions related to debt forgiveness on government loan assets. Debt forgiveness is treated as a capital transfer in the BOP with a corresponding entry in the financial account to reflect the reduction of the loan assets equivalent to the value of the debt forgiven. A reconciliation of these transactions was conducted with the GFS data source from 2008 onward, and this resulted in an improved quality of this information recorded in both the capital and financial accounts.

Classification changes

The capital account of the balance of payments includes two types of transactions; transactions in non-produced non-financial assets and capital transfers. Revisions to the capital account mostly arise from the change in the treatment of some special international transactions to better reflect their nature in the international accounts and better align their treatment within the macroeconomic accounts framework.

Some transactions previously classified as 'financial assets' and recorded in the financial account of the BOP are now classified in the capital account as transactions in 'non-produced non-financial assets'. This includes transactions such as the sale/acquisition of non-financial assets by governments and corporations. The net impact on the overall BOP of this classification change is nil. However, in addition to the reclassification, a review of similar transactions in most recent years has been conducted and resulted in an improved coverage of these transactions in the BOP.

Revisions to the monthly program on Canada's international transactions in securities

This program provides information on the size and the nature of transactions in Canadian and foreign securities between resident and non-resident investors, including information on foreign holdings of domestic debt securities. This information is also integrated in the financial account of the BOP and in the IIP.

Statistical change

Statistical changes to the monthly program on Canada's international transactions in securities mostly refer to the implementation of a more robust methodology to generate market value estimates of foreign holdings of Canadian bonds from 2007. Canadian bonds at market value are now evaluated in the monthly program, and in the IIP, based on month-end observed market prices on an instrument basis, where available. The new approach replaces the one where average transaction prices were used during the period as a proxy for observed prices.

Classification changes

One of the major revisions to the series on international transactions in securities relates to the change in classification of Canadian covered bonds and their improved coverage, as mentioned previously in this article. These instruments are now included in securities and largely explain revisions to flows and positions of Canadian bonds in the monthly program from 2007.

Additional details are also available on a monthly basis with respect to Canada's international transactions in securities, covering new analytical dimensions related to this type of activity.

First, market value estimates of foreign holdings of Canadian debt securities are now produced on a monthly basis and released as part of Canada's International Transactions in Securities. These estimates were available on a quarterly basis only as part of the IIP release prior to the 2015 Comprehensive Revision of the CSMA.

Second, the monthly position series on Canadian debt securities held by non-residents by sector of issuer is now available by currency of issue. This new information highlights the importance of foreign currency-denominated debt securities issued by Canadian governments and corporations and the extent to which this stock of debt is exposed to currency fluctuations.

Third, another dimension added to the monthly Canadian debt securities foreign position series relates to the maturity of these instruments. The maturity of debt securities is expressed either as short-term or long-term. Short-term refers to instruments with a maturity of one year or less while long-term is defined as more than one year. The maturity can be expressed based on the 'original maturity' or the 'remaining maturity'^{Note 2}.  A new series on foreign holdings of Canadian debt securities by remaining maturity (short-term and long-term) is now available, with positions expressed either at nominal value (borrowers' perspective) or market value. This series complements the existing information published on original maturity. Information by remaining maturity provides further details on the liquidity dimension of Canada's external portfolio debt and on the amount of outstanding debt that Canadian borrowers will have to repay in a short (one year or less) and long-term (more than one year) horizon.

Notes