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|Canada's balance of international payments
System of National Accounts
Third quarter 2005
Analysis — Third quarter 2005
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.
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 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.
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.
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.
US residents continued to reduce their spending in Canada as the number of visitors 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.
Canadian appetite for foreign securities continues to grow
Canadians invested $16.8 billion in foreign securities during the third quarter, 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. Canadian investors bought US government treasury bills but sold some of their holdings of overseas paper.
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.
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.
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.
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. There has been a large foreign divestment of $2.6 billion in Canadian paper so far this year. 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).
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. Non-residents increased their deposits with a record $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.
Reconciliation of the Canadian - U.S. current account, 2003 and 2004
On a reconciled basis, the Canadian surplus, or U.S. deficit, is US$38.3 billion for 2003 1 and US$52.2 billion for 2004 (see table 1 ). 2 The Canadian published current account balance with the U.S. is a Canadian surplus of US$41.4 billion for 2003 and a Canadian surplus of US$53.4 billion for 2004. The corresponding U.S. published balance is a U.S. deficit (Canadian surplus) of US$30.4 billion for 2003 and a U.S. deficit (Canadian surplus) of US$42.2 billion for 2004. 3
The results of the reconciliation of the bilateral current account estimates of Canada and the United States for 2003 and 2004 are presented in this article. 4 Further details of the current account reconciliation for 2003 and 2004 are presented in supplementary tables included in the paper Reconciliation of the Canadian - U.S. current account, 2003 and 2004 (catalogue number 67F0001M200523). 5
Reconciled current account balances
In the Canadian current account, the reconciliation adjustments result in a decrease of US$3.1 billion in the Canadian surplus for 2003 and in a decrease of US$1.2 billion in the Canadian surplus for 2004. For both years, the decreases in the Canadian surplus reflect larger downward adjustments to the Canadian southbound estimates than to the Canadian northbound estimates. 6 For both years, the largest downward adjustments to the Canadian southbound estimates are from definitional adjustments to goods, from the elimination of the withholding tax in current unilateral transfers (definitional adjustment), and from adjustments for definitional differences in "other" services. In the Canadian northbound estimates, the largest downward adjustments are to eliminate statistical differences in income on U.S. holdings of Canadian bonds and to eliminate withholding tax from direct investment and “other” investment income (definitional adjustments).
In the U.S. current account, the reconciliation adjustments result in an increase of US$7.9 billion in the U.S. deficit for 2003 and an increase of US$10.0 billion in the U.S. deficit for 2004. For both years, the increases reflect larger upward adjustments to the U.S. southbound estimates than to the U.S. northbound estimates. For both years, the largest increases in the U.S. southbound estimates result from the addition of Canadian reexports to U.S. goods imports (a definitional adjustment), from the valuation of U.S. natural gas imports to include inland freight (a definitional adjustment), and from statistical adjustments to southbound services. For both years, the largest increases in the U.S. northbound estimates result from upward adjustments to investment income for statistical differences in income on U.S. holdings of Canadian bonds and from adjustments for statistical differences in "other" services.
Summary of reconciliation methodology
In reconciling the Canadian and U.S published bilateral current account estimates, the estimates are first restated to a common basis, that is, they are adjusted for definitional and methodological differences; the remaining adjustments that are needed to reach the reconciled values are the statistical adjustments. The framework for reconciling the Canadian and U.S. estimates to a common basis mainly follows the international standards published in the International Monetary Fund's Balance of Payments Manual (fifth edition). The Canadian and U.S. published estimates now largely conform to the international standards, but some differences with the international standards, and between the Canadian and U.S. estimates, remain in the published estimates because of data limitations, difficulties in determining country attribution, differences in classification, and because in a few cases, international standards provide for more than one acceptable treatment.
The definitional adjustments mainly reflect data limitations and differences in country attribution. For example, as part of the reconciliation, U.S. published estimates of imports of goods from Canada are adjusted to include Canadian reexports to the United States (goods imported by Canada from third countries and then reexported to the United States without substantial changes) because U.S. imports of goods are recorded on a country of origin basis. Another example of a definitional adjustment is that the Canadian estimates, mainly investment income, are adjusted to a basis that is net of withholding taxes because the U.S. withholding tax estimates, which are included on a global basis in the U.S. published accounts, cannot be allocated by country for comparison with the Canadian estimates. As a result, the reconciled estimates depart from the international statistical standards, but without this adjustment, the estimate could not be compared on a common basis.
The methodological adjustments mainly reflect differences in classification. For example, parts of the U.S. estimates of film rentals and courier services are recorded in various services accounts; for reconciliation, they are reclassified to a single account. A few Canadian and U.S. accounts, mainly interest income, are adjusted to a net or gross basis for comparability. Methodological adjustments do not affect the current account balance because the northbound and the southbound methodological adjustments are offsetting.
Statistical differences reflect the use of different source data in Canada and the United States, the difficulty in determining country attribution because of insufficient data, the preliminary nature of some of the data (particularly for the most recent year), and the use of sample data between benchmarks. For both the northbound and the southbound estimates, most of the statistical differences are in the U.S. and Canadian estimates of "other" services and of investment income.
Note on the Canadian - U.S. current account reconciliation
The Canadian-U.S. current account reconciliation, which explains the differences between the estimates of the bilateral current account published by Statistics Canada and those published by the U.S. Bureau of Economic Analysis (BEA), is undertaken because of the extensive economic links between Canada and the United States. The reconciled estimates are intended to assist analysts who use both countries' statistics and to show how the current account estimates would appear if both countries used common definitions, methodologies, and data sources. 7
In principle, the bilateral current account of one country should mirror the bilateral current account of the other country. Differences occur in the published estimates of the U.S. and Canadian current accounts because of variations in the definitions, methodologies, and statistical sources that are used by each country. Some of the differences for 2004 are in components of the current account for which data are still preliminary and subject to revision; these differences may be eliminated when final data for these components become available.
The longstanding Canadian-U.S. current account reconciliation is among the leading examples of the benefits of international data exchanges. As a part of the reconciliation process, Canada and the United States have evaluated the accuracy of each other's estimates, and as a result, each country now includes in its published estimates some data that are provided by the other country. The exchange of data between Canada and the United States for transactions such as trade in goods, travel, passenger fares, Canadian and U.S. Government transactions, and some large transportation transactions covers a substantial portion of the value of the Canadian and U.S. current account and has eliminated some of the differences in the Canadian and U.S. published estimates. In addition, the reconciliation process has highlighted areas where errors and omissions may exist in each country's estimates, which has helped in targeting data improvement efforts.
Although the U.S. and Canadian published estimates are reconciled and there is extensive exchange of data between Canada and the United States, differences in the published estimates remain. Complete substitution of the reconciled estimates for published estimates and complete exchange of data are not feasible for several reasons. For trade in goods, imports in the U.S. accounts would be affected because the United States attributes Canadian reexports to the country of origin rather than to Canada, the last country of shipment. For some accounts, the protection of the confidentiality of the source data bars the exchange of data. Finally, a few differences are attributable to different requirements for integrating the international and national (domestic) accounts in each country.
Text table 1