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|Canada's Balance of International Payments
System of National Accounts
First quarter 2006
Analysis — First quarter 2006
Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, dropped $2.4 billion in the first quarter of 2006 to $10.7 billion. The decline was mostly the result of a sharp drop in the value of energy exports, which was very high in the fourth quarter of 2005.
In the capital and financial account (not seasonally adjusted), Canada's international assets and liabilities grew by the same value. The increase to Canada's foreign assets came from record high acquisitions by portfolio investors.
The surplus on trade in goods fell by $3.3 billion to $17.2 billion in the first quarter. Lower prices for natural gas tempered Canada's exports of energy products, after reaching a record level in the fourth quarter of 2005. Imports dropped more modestly in the quarter as the volume of crude oil purchases declined.
Exports of goods fell $4.7 billion in the first quarter. Exports of energy products led the way as lower prices pushed down the export values for these products by $4.0 billion. In the first quarter, prices of natural gas decreased by nearly 30% after strong increases during the previous two quarters.
During the last three quarters, the value of energy products represented on average over 20% of all exports, compared to less than 16% in 2004.
Automotive product exports were down by $1.0 billion in the first quarter, the drop being spread among automobiles, trucks, and parts.
Total imports of goods declined by $1.4 billion and again energy products accounted for the largest share. However, the drop in imports of energy products came mainly from lower volumes, not through lower prices as was the case for the exports of energy products.
Lower profits earned by foreign investors on their direct investment in Canada, combined with lower interest payments on portfolio bond liabilities, were the two main factors behind the $1.3 billion decrease in the investment income deficit. The $2.3 billion deficit in the first quarter was the lowest since 1978.
Following two strong quarters, profits earned by foreign direct investors decreased $2.4 billion in the first quarter of 2006. Although still important, lower profits in the energy sector accounted for half of this drop.
The first quarter also saw lower profits earned by Canadians on their direct investment abroad. As the decline was only $1.2 billion, the balance for income on direct investment swung to a positive value for the first time since the first quarter of 1994.
Interest paid on Canadian portfolio bond liabilities continued its downward trend, which started in 2003, while interest received on foreign bonds remained above the $1 billion mark, twice the average amount recorded between 2000 and 2004.
In the first quarter, the deficit on trade in services rose for the fourth time in the last five quarters. The deficit in the travel account increased $0.2 billion to $1.8 billion. Changes in other service components largely offset each other.
The $1.8 billion deficit in travel was the largest in 14 years. While Canadian travelers continued to increase their spending abroad, the spending of foreign travelers in Canada decreased for a fifth consecutive quarter. Over this period of five quarters, the travel deficit has risen by $1.0 billion.
During the first quarter, Canadian investors bought a record amount of foreign securities consisting of debt instruments and equities. Over half of the $19.0 billion investment in the first quarter was in foreign bonds, itself a record. Foreign content limits for tax-deferred Canadian investment vehicles were eliminated during 2005, contributing to the activity.
Some $9.9 billion flowed into foreign bonds, with most of the investment (60%) going to US treasuries and corporate bonds. The remaining $3.9 billion was invested in overseas bonds. A sizable portion of the record investment in foreign bonds consisted of "Maple" bonds. This rapidly growing segment of the bond market involves foreign issuers marketing debt denominated in Canadian dollars to institutional investors in Canada.
Canadians purchased $8.0 billion of foreign equities in the first quarter, the second highest quarterly investment in the past four years. Over four-fifths went to buy US shares with the remainder to overseas equities. Canadian investors also purchased $1.0 billion worth of foreign money market paper. Canadians bought $1.5 billion of overseas paper while selling $0.5 billion of their holdings of US government and corporate paper.
In the first quarter, Canadian direct investment in foreign economies was just over half of that of the previous quarter. At $6.6 billion, it was driven by injections of working capital into existing foreign affiliates. Canadians sold off more direct investment assets overseas than they acquired during the quarter, resulting in negative net acquisitions. From an industry perspective, investment was spread, led by the finance and insurance sector. Geographically, about three-quarters went to the American economy.
Foreign direct investment in Canada advanced strongly for a third consecutive quarter. Although less than the previous two quarters, the $12.0 billion of direct investment was again largely due to acquisitions. Two-thirds of this foreign direct investment went to the energy and metallic minerals sector while over half of the investment came from Europe.
Foreign investors bought $8.2 billion worth of Canadian securities led by purchases of outstanding Canadian equities. It was the largest net investment in Canadian securities by foreign investors in the last five quarters. Overall investment in debt instruments was negligible, as foreign investors bought money market paper but sold bonds.
The $8.1 billion net foreign investment in Canadian equities was led by the acquisition of $10.6 billion of outstanding Canadian shares by non-residents. This was partly offset by reductions associated with the foreign takeover of Canadian firms, which saw foreign (portfolio) shareholders in these firms exchanging their Canadian shares for cash or foreign shares. US investors were behind most (80%) of the investment in the quarter as they were in 2005. The first quarter purchases occurred against a backdrop of rising Canadian share prices: the S&P/TSX Composite Index rose more than 22% over a nine month period.
Foreign investors made a significant investment in Canadian money market paper for a second consecutive quarter. The fourth quarter investment of $3.1 billion was the highest value in more than five years. The $2.0 billion foreign investment during the first quarter went to federal t-bills. During the quarter, the government of Canada had a large issue of US-pay Canada bills. Regionally, the investment was entirely purchased by American investors. With short-term rates on the rise in both countries, US rates continue to be higher with the differential at the end of the period at 65 basis points, favouring investment in the United States.
Non-residents sold Canadian bonds for a third consecutive quarter. The divestment of $1.9 billion in the quarter was largely the result of net retirements (retirements less new issues). There have been high levels of retirements over the past three quarters and at the same time new issues sold in foreign markets have trended down. However, non-residents continued to buy outstanding bonds, mainly denominated in Canadian dollars. Over the first quarter, the divestment was led by European investors while investors from Japan continued to move against the trend and buy Canadian bonds.
The other investment account recorded a net inflow of $4.6 billion. The inflow was mostly related to higher liabilities, both loans and deposits. On the asset side, Canada's official international reserves rose by $3.8 billion, the highest quarterly increase in six years. The Canadian dollar ended the first quarter virtually the same as it began, at 85.6 US cents. The Canadian dollar was down somewhat against most other major foreign currencies.
Annual and quarterly data have been revised for reference years 2002 to 2005. This is in keeping with the general policy to revise National Accounts statistics back four years at the time of the first quarter data release. Broadly, the revisions reflect more current sources of information coming from annual surveys and administrative data.
The latest set of revisions reduced the Current account surplus from 2002 to 2004 while expanding it in 2005. At the same time, net outflows on the Capital and Financial account increased strongly for the years 2002, 2004 and 2005.
The Current account surplus was revised down in each year of revision period except 2005 where the large upward revision to investment income on assets dominated the other changes. The largest net current account revision occurred in 2003 where the surplus was reduced by $4.3 billion. The 2003 surplus was already the lowest one since 2000.
The revisions to goods were negative for exports but positive for imports. For 2003, an adjustment for undercoverage and undervaluation of exports, due notably to the large fluctuation in the exchange rates, was reduced by $1.5 billion. This change came after further macroeconomic analysis with the input-output matrices. With real data replacing estimates for the latest months of 2005 there was a negative impact of $0.4 billion on the export of energy products.
Large revisions to goods imports were mostly related to late entries in Customs figures, pushing up the value of imports by $0.8 billion in 2004 and $1.1 billion in 2005. These revisions were made mainly to the transportation equipment products, including automotive products. Adjustments for illegal imports of cigarettes and undervaluation of postal imports have been revised upward by a combined amount of more than $0.3 billion in 2005.
There have been important revisions to commercial services as more recent statistics were available from surveys and data exchange. There was also a more intensive use of administrative data to replace values for non-responses.
On a net basis, both exports and imports increased by the same amount in 2004 and 2005. However, for 2002, higher exports exceeded upwardly revised imports by $0.5 billion. For 2003, the situation was reversed.
The most important positive revisions to the exports of services have been made to research and development, architectural and engineering services, and to management services. Audio-visual services, advertising and primary insurance had significant negative corrections. In total, exports of commercial services were increased by $1.1 billion in 2002, $1.5 billion in 2003, $2.0 billion in 2004, and $1.9 billion in 2005.
Imports of commercial services were raised by $0.5 billion in 2002 and about $2 billion in the three subsequent years. Computer services, royalties, and research and development were among the categories recording the largest positive changes. For tooling and other miscellaneous services as well as reinsurance (in 2004 and 2005), there were important reductions.
In general, net revisions to transportation services were small as downward revisions to receipts and payments on airline expenditures were offset by higher transactions on ocean shipping. Some components of transportation have also been revised to be more in line with United States estimates following the annual exercise of reconciliation of the bilateral current account.
Corrections to government services and to travel were generally small except for travel in 2005 where survey data replaced the estimates made for the fourth quarter.
The deficit on investment income was increased in 2002 and 2003 due to lower receipts and higher payments. In 2004, payments were revised down by almost the same amount as the receipts while, in 2005, a very large upward revision to receipts reduced the deficit by $4 billion.
In 2002 and 2003, the receipts on investment income were revised down mainly due to lower portfolio dividends. A new methodology was put in place to take advantage of the information available from the quarterly positions of these instruments. The new methodology generated lower revenues in 2002 and 2003 but higher ones for the next two years.
Canadian banking interest income on assets was revised down $0.8 billion in 2004 and $0.2 billion in 2005. Based on the latest full year of survey results, dividend receipts on direct investment abroad increased $0.5 billion in 2004 and $1.0 billion 2005. The revision was notable in the energy sector. Reinvested earnings were downwardly revised by $1.3 billion in 2004, mostly in the metallic minerals and energy sectors. Revisions to reinvested earnings were positive in 2005 by $1.0 billion due to the banking and other finance and insurance sectors and to the consumer goods and services sector.
Investment income payments changed slightly in 2002. However, the 2003 payments were revised up by $1.4 billion mainly due to higher reinvested earnings in the energy sector. In 2004 and 2005, the revisions were broadly distributed.
With new results from annual surveys as well as some revisions from data provided by Industrial Organization and Finance Division, profits were revised downward by $1.0 billion in 2004, finance and insurance being really the only sector showing large improvement. Branch profits were revised down by $0.3 billion. In 2005, the downward change to direct investment dividends was offset by an equivalent increase for the reinvested earnings.
Interest paid on corporate bonds was reduced by $0.4 billion for both 2004 and 2005 as positions on bonds were revised down by $7 billion and $4 billion respectively. Portfolio dividends were increased by $0.9 billion in 2004.
While revisions to receipts of current transfers were relatively small over the four years, revisions to payments were large due to two factors.
First, contributions by non-governmental organisations were increased by $0.3 billion in each year. Information from the administrative source used for this estimate was much more detailed this time allowing the inclusion of some expenses as transfers. However, it is expected that less detail will be provided from the administrative source in future making results more difficult to estimate, especially if governmental contributions to Canadian non-governmental organizations are reported together with other types of revenues.
Second, personal transfers were also revised largely due to an updated methodology using a better factor applied to the average expenses.
In general, net outflows on the Capital and Financial account increased strongly by $4.2 billion, $10 billion and $7 billion for the years 2002, 2004 and 2005. Contributing to this were reduced liabilities to the rest of the world and increased Canadian assets abroad. In 2003 however, the net outflow went down modestly as there were offsetting changes within the liability and asset accounts.
Two changes should be highlighted. One involved an improved measurement of foreign holdings of Canadian money market paper for the year 2002. The processing was moved to the same system that processes these instruments after 2002 and is also used to process foreign money market paper held by Canadians from 2002. The system is based on an instrument approach with greatly improved results. A second change involved the inclusion of important new respondents to the portfolio survey covering Canadian portfolio investment abroad. As a result, increases were recorded in the acquisition of foreign equities over the four years under revision.
The largest revisions to flows were concentrated in 2004 due to the receipt and processing of annual surveys and revised administrative data. Broadly, additional transactions increased international assets and, at the same time, reduced liabilities to non-residents. The $4.2 billion increase to assets was concentrated in portfolio investment as previously discussed and to deposits in the other investment account. The receipt of revised administrative data increased the deposits. The one major exception was that outflows on Canadian direct investment abroad were reduced significantly from $61.7 to $56.3 billion. Annual survey data reduced outflows on short-term inter-company loans and to reinvested earnings on this account.
In 2004, inflows on Canadian liabilities were reduced by $5.8 billion. The reductions were concentrated in two accounts, foreign direct and portfolio investment in Canada with some offset in the other investment accounts. Annual survey data showed that short-term inter-company claims with their foreign parents and affiliates were greatly reduced.
In 2002, outflows increased by $4.2 billion in total. Increases to assets of $2.3 billion were mainly confined to portfolio equities, as discussed above. The reduction to Canada’s international liabilities with the rest of the world was $1.9 billion. This was entirely due to the better measurement of Canadian short-term paper held by non-residents. However, there was some offset from a larger increase to foreign direct investment in Canada.
2003 saw revisions to flows that were largely offsetting—net inflows were augmented by $435 million in total. Flows on foreign direct investment were reduced by roughly the same amount that the portfolio and other investment liability accounts increased. Canadian assets abroad also saw some offsetting changes in 2003. Increases to portfolio equities were roughly offset by reduced deposits in the other investment account.
In 2005, net outflows went up by $7 billion. This was made up of increased payments lowering Canada’s international liabilities ($4.1 billion) and higher outflows increasing assets abroad ($3.0 billion). Portfolio liabilities with the rest of the world were reduced — revised survey data on Canadian bonds swung the inflow on that account to an outflow while inflows were reduced on Canadian equities. The change in this account was due to some better data on acquisitions of foreign direct investment where the foreign portfolio investors of these firms received cash or shares. At the same time, there was compensation as certain liability accounts were increased namely foreign direct investment in Canada and the other investment account.
Canadian assets abroad in 2005 were revised higher by $3 billion due to two factors. Higher outflows on Canadian direct investment was due to better quarterly survey data on working capital increases in foreign affiliates. Secondly, there were increases to outflows on foreign portfolio equities due to the inclusion of new survey respondents. There was also an increase to outflows on foreign portfolio bonds due to revised survey information. At the same time there was some balancing due to lower increases to foreign assets in the other investment accounts, mainly to deposits and loans.