Fourth quarter 2003 

Canada's current account surplus with the rest of the world declined $1.2 billion in the fourth quarter to $6.7 billion on a seasonally adjusted basis. This decline resulted from a lower surplus on trade in goods and a higher deficit on investment income. The current account surplus for all of 2003 was $25.8 billion, the fourth consecutive year that exceeds $20 billion.

The capital and financial account (not seasonally adjusted) showed funds flowing out of Canada to the rest of the world for a third straight quarter. Canada's direct investment abroad was the strongest in 10 quarters, while foreign portfolio investors injected funds into both Canadian stocks and bonds.

Chart 1
Current account balance

In the fourth quarter, the Canadian dollar resumed its appreciation against the US dollar, while continuing to lose ground against other major currencies. The Canadian dollar finished 2003 at 77.13 US cents, up 13.7 cents or 21.7% from the start of the year.

Current account

Goods surplus falls

The surplus on trade in goods was $15.1 billion in the fourth quarter, down $0.6 billion from the third quarter. Exports decreased by $0.4 billion to $98.2 billion, the lowest level in four years. Energy prices continued to play an important role in the fluctuation in nominal exports. They were largely responsible for the $1.7 billion drop in value of energy exports. Partly offsetting this fall was a $1.1 billion rebound in exports of industrial goods, which had declined over the previous four quarters.

Chart 2
Export of energy products

Imports increased by $0.2 billion, with a rebound in passenger autos, up $1.0 billion from a low third quarter. Machinery and equipment imports fell $0.8 billion, as most of the components had lower values in the fourth quarter.

For 2003 as a whole, nominal exports and imports both declined, with imports down more than 4% and exports more than 3%. The goods surplus rose $2.4 billion to $60.2 billion. The lower value for exports came as higher prices for energy products were more than offset by lower values of exports for machinery and equipment and automotive products. On the import side, there were large declines in import values for machinery and equipment and automotive products, partly offset by higher import values of energy products, although more modest than those for exported energy.

Between 2000, when both export and import values peaked, and 2003, exports decreased by $28.5 billion and imports, by $20.9 billion. Machinery and equipment and in particular telecommunication and related equipment saw the largest drops in both exports and imports during that period. Surpluses in automotive products and in forestry products have been reduced by $9.1 billion and $8.2 billion respectively over this period. On the positive side, the surplus in energy products rose $6.1 billion over these three years.

Lower profits earned on direct investment abroad

After the lowest deficit on investment income in more than 10 years was registered in the third quarter, the deficit increased $0.6 billion to $5.6 billion in the fourth quarter.

Chart 3
Investment income balance

The profits earned by Canadian direct investors abroad dropped $0.6 billion to $3.7 billion, led by lower returns in the energy and the finance and insurance sectors.

As a large part of the Canadian securities owned by foreign portfolio investors are issued in US dollars, the stronger Canadian dollar contributed to the $0.2 billion reduction in interest paid on these securities.

In 2003, interest paid on these Canadian securities was $1.9 billion lower than in 2002. This was the main factor in the $4.0 billion reduction in the investment income deficit for 2003. The other important factor was a $1.2 billion drop in interest payments on foreign currency deposits. In both cases, it was mostly related to the stronger dollar.

Services deficit remains stable

In the fourth quarter, the deficit on services declined by less than $0.1 billion to $2.9 billion. The largest change came from travel, where higher expenditures on travel abroad led to a $0.2 billion increase in the deficit. There were a record number of Canadians travelling to countries other than United States in the fourth quarter. At the same time, US travellers started to visit Canada in larger numbers again after two very slow quarters.

While the trade balances for all major categories of services remained largely unchanged from the third to the fourth quarter, the overall deficit on services trade for 2003 increased $3.2 billion to reach $11.5 billion.

During the year, the travel deficit increased $2.4 billion to reach $4.3 billion, the highest deficit in a decade. Spending by foreign visitors fell $2.1 billion. Several factors such as concerns about SARS and mad cow disease led to a considerably lower number of visitors to Canada in 2003. There were 13% less visitors spending at least one night in Canada in 2003 than in 2002.

As a consequence of the lower number of foreign visitors coming to Canada and a higher number of Canadians visiting countries other than United States, the deficit for passenger fares increased by $1.0 billion to reach $1.8 billion in 2003.

Chart 4
Canadian direct investment abroad¹

Financial Account

Direct investment abroad rebounds

Canadian direct investment abroad rebounded strongly to $17.1 billion in the fourth quarter, quadruple the average of the three previous quarters. More than half the investment came from acquisitions of foreign enterprises, which were at a three-year high. Two-thirds of the direct investment was invested in European Union countries; the remainder went to Asian countries and the United States. The investment was concentrated mainly in just two industry groups: finance and insurance and energy and metallic minerals.

Canadian demand for foreign securities on the rise

Canadian investors bought $5.2 billion of foreign securities in the fourth quarter, their highest investment in a year and a half. Just over 60% was invested in foreign equities, with the remainder in foreign bonds.

Canadians split their $3.2 billion investment in foreign shares between US and overseas equities. While the investment in shares was the highest for any quarter of 2003, the investment for the year, at $4.3 billion, was the lowest in 13 years. Canadian demand for foreign bonds, however, was at an all-time high in 2003, with an investment of $8.2 billion. About half of this went to US treasury bonds with the remainder split between US corporate and overseas bonds.

Foreign portfolio investment in Canadian securities returns

Foreign portfolio investment of $8.5 billion flowed into Canadian securities in the fourth quarter, largely reversing the reduction in holdings in the third quarter. Investment in Canadian securities for 2003 totalled $15.2 billion. A robust foreign demand for Canadian equities made up 85% of this annual total with investment in debt securities accounting for the balance.

Foreign investors purchased $5.2 billion of Canadian equities in the fourth quarter, an amount similar to that of the third quarter. However, while the investment in the third quarter went almost exclusively to existing shares, most of the fourth quarter investment was in new shares, largely issued to acquire foreign firms via share exchanges.

With Canadian stock prices surging, foreign investment in existing Canadian shares was substantial in 2003. It represented $9.0 billion of the $12.9 billion total. Canadian stock prices advanced 10.8% in the fourth quarter and 24.3% during 2003. It was a major turnaround from the 26.0% decline in share prices over 2001 and 2002.

In the fourth quarter, $3.7 billion worth of Canadian bonds were purchased by foreign investors while they sold a small amount ($395 million) of money market securities. The investment in bonds came after a major sell-off in the third quarter, totalling $12.5 billion. In the fourth quarter, investors bought mostly corporate bonds and some issues of federal enterprises, partly offset by sales of bonds issued by the federal and provincial governments. On a currency basis, foreign investors bought $7.9 billion of US-dollar denominated bonds but sold $4.2 billion of bond issues denominated in Canadian dollars.

Foreign holdings of Canadian money market paper were reduced for a fourth straight quarter bringing the reduction to a total of $4.4 billion for 2003. This more than reversed the $3.8 billion accumulation in 2002. The foreign divestment in 2003 was spread across money market paper issued by all sectors, with the exception of federal treasury bills.

Chart 5
Foreign direct investment in Canada

Foreign direct investment in Canada turns negative

Foreign direct investors withdrew funds from Canada for a second straight quarter. While the amounts were low, a net withdrawal was last seen in the early 1990s. As a result, foreign direct investment in Canada for 2003 was the lowest in 10 years, at just $8.3 billion. The acquisitions component of foreign direct investment, which averaged $28.1 billion annually from 1998 to 2002, was negative in 2003. In other words, on balance, residents bought back Canadian firms from foreign direct investors in 2003.

Other investment

Over the fourth quarter, the other investment category saw net capital inflows dominated by loans under repurchase agreements. Canada's international reserves continued to decline for a sixth consecutive quarter.

Text table 1
Balance of payments, all countries, not seasonally adjusted - Quarterly and annual, 2000 to 2001

Text table 2
Balance of payments, all countries, not seasonally adjusted - Quarterly and annual, 2002 to 2003

Text table 3
Current account, all countries, seasonally adjusted - Quarterly and annual, 2000 to 2001

Text table 4
Current account, all countries, seasonally adjusted - Quarterly and annual, 2002 to 2003

Text table 5
International transactions in services by detailed category, not seasonally adjusted - Quarterly and annual, 2000 to 2001