Canada's Balance of International Payments

System of National Accounts

Third Quarter 2008

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The current account surplus with the rest of the world (on a seasonally adjusted basis) dropped to $5.6 billion in the third quarter of 2008, down from $8.2 billion in the previous quarter. The reduction was largely as a result of a lower goods surplus, as commodity price gains slowed; and, a higher investment income deficit, as Canadian earnings on foreign direct investment were down.

Chart 1
Current account balance

In the capital and financial account (unadjusted for seasonal variation), cross-border direct investment flows strengthened, with notably large Canadian direct investment abroad and a resumption of foreign acquisition of Canadian companies. In contrast, with deteriorating conditions on equity and credit markets, Canadian investors' demand for foreign securities slowed while non-resident investors reduced their holdings of Canadian stocks and bonds.

Current account

Goods surplus falls, as export prices slow

The goods surplus narrowed to $15.2 billion in the third quarter, as the growth in imports outpaced that of exports. Export growth slowed considerably in the quarter, though receipts were up $3.7 billion. The largest increases were recorded in industrial goods, generally reflecting price gains across most commodities. However, the $1.0 billion increase for metal ores was almost exclusively on higher volumes.

Energy products exports decreased somewhat in the third quarter, as volumes were down while prices continued to advance. However, price gains were at a much reduced pace compared with recent quarters. Natural gas prices (+4.3%) and crude petroleum prices (+1.6%) decelerated sharply from the second quarter increases of 30% and 23% respectively. The exception was coal products, which recorded a second consecutive price increase above 50%.

Imports rose by $4.7 billion in the third quarter. The increase was distributed among all major groups of products. Imports of industrial goods were up $1.4 billion, entirely as a result of higher prices.

Chart 2
Goods and other Current account balances

Investment income deficit led by decline in earnings on Canadian direct investment

The investment income deficit increased $1.8 billion in the third quarter. Profits earned on Canadian foreign direct investment positions fell back $1.2 billion, after a high in the second quarter. Despite this reduction, earnings accruing to Canadian direct investors remain at historically high levels.

Chart 3
Investment income balance

Payments were also up in the third quarter. Earnings of foreign direct investors were up marginally as the Canadian energy sector marked another record profit quarter, moderated by a reduction of profits in the financial and insurance sector. As well, payments on portfolio foreign investment edged up in the third quarter. This largely reflected higher interest paid on Canadian bonds owned by non-residents, especially for US dollar denominated corporate bonds.

Services deficit falls, on reduced spending on commissions and travel

The overall deficit on services narrowed by $0.3 billion in the third quarter. This easing was led by a decline in the commercial services deficit, with most of the change related to lower commissions paid on transactions in securities.

For a third consecutive quarter, the travel deficit eased, down from the fourth quarter 2007 peak. Spending by Canadians was down for both United States and overseas destinations, possibly dampened by the depreciation of the Canadian dollar over the quarter. However, foreign spending in Canada remained unchanged, despite fewer travellers coming to Canada. The transportation deficit edged up in the third quarter, largely on higher payments associated with more Canadians travelling overseas.

Capital and financial account

Foreign direct investment activity picks up

Foreign direct investment cross-border flows increased significantly in the third quarter after having slowed in the second quarter. Canadian direct investment abroad outpaced foreign direct investment in Canada, a trend observed since the beginning of the year.

Chart 4
Foreign direct investment

Canadian direct investors placed $29.0 billion in foreign economies, the highest outflows on this account in four years. The bulk of this investment was generated from the finance and insurance sector, and represented an injection of funds into existing foreign subsidiaries, largely in the United States.

Two-thirds of all the direct investment abroad to date in 2008 originated from the financial sector of the Canadian economy, similar to the average of the last three years. On a geographical basis, direct investment in the United States has accounted for about 60% of the total investment so far in 2008, in line with the trend observed in 2007.

Foreign direct investment in Canada rebounded from a low in the second quarter, reflecting in part foreign acquisitions of Canadian firms. Inflows of $17.4 billion in the third quarter were mainly comprised of investment from the United States and Europe, with almost half directed to the Canadian energy and metallic minerals sector.

Portfolio investors shed debt instruments

International transactions in securities in the third quarter reflected conditions on global debt and equity markets, and were likely influenced to an extent by a weakening domestic currency and declining short-term interest rates in the Canadian and US markets. As a result, Canadian investors purchased foreign securities at a much reduced pace compared with the previous three quarters, while non-resident investors sold Canadian securities.

Chart 5
Foreign portfolio investment

Acquisitions of foreign securities by Canadian investors slowed to $796 million over the third quarter of 2008. With interest rates in decline, investors further reduced their overall holdings of debt instruments—mainly, US government bonds. In addition, they continued to add corporate shares to their foreign portfolios, almost all US shares. This represents a largely consistent investment pattern over the last four quarters, coinciding with the tightening of worldwide credit conditions in the latter part of 2007.

Chart 6
Canadian portfolio investment abroad

On the other hand, while Canadian bonds have been a relatively attractive investment over the same period, foreign investors lost their appetite for these instruments in the third quarter of 2008. Non-residents sold $7.0 billion of Canadian securities, both bonds and equities, following unprecedented acquisitions the quarter before. The reduction in holdings of Canadian bonds and equities was moderated by a second consecutive quarter of investment in the Canadian money market, as interest rates continued to slide.

Despite an overall foreign divestment in Canadian securities, non-residents added Canadian debt instruments denominated in US dollars, amounting to $5.9 billion during the third quarter.

Reconciliation of the Canadian - U.S. current account, 2006 and 2007 ¹ 

On a reconciled basis, the Canadian surplus, or U.S. deficit, is US$59.7 billion for 2006 and US$51.8 billion for 2007 (table 1). ²  The Canadian published current account balance with the U.S. is a Canadian surplus of US$58.0 billion for 2006 and a Canadian surplus of US$47.7 billion for 2007. The corresponding U.S. published balance is a U.S. deficit (Canadian surplus) of US$46.0 billion for 2006 and a U.S. deficit (Canadian surplus) of US$37.3 billion for 2007.  ³ 

Text table 1: Canada-United States Current Account Reconciliation - 2006

Text table 2: Canada-United States Current Account Reconciliation - 2007

The results of the reconciliation of the bilateral current account estimates of Canada and the United States for 2006 and 2007 are presented in this article. ⁴  Further tables of the current account reconciliation for 2006 and 2007 are available on demand.  ⁵ 

Reconciled current account balances

In the Canadian current account, the reconciliation adjustments result in an increase of US$1.7 billion in the Canadian surplus for 2006 and in an increase of US$4.1 billion in the Canadian surplus for 2007. For both years, the increases in the Canadian surplus reflect downward adjustments to the Canadian northbound estimates, which were partly offset by downward adjustments to the Canadian southbound estimates.  ⁶  For both years, the largest downward adjustments to the Canadian southbound estimates are from the elimination of the withholding tax in current unilateral transfers (definitional adjustment), from adjustments to bring “other” investment income to a net basis (methodological adjustment), and from adjustments for statistical differences in affiliated services. In the Canadian northbound estimates, the largest downward adjustments for both years are from the elimination of withholding tax from direct investment and “other” investment income (definitional adjustments), from adjustments to bring “other” investment income to a net basis (methodological adjustment), and from definitional adjustments to “other” services.

In the U.S. current account, the reconciliation adjustments result in an increase of US$13.7 billion in the U.S. deficit for 2006 and an increase of US$14.5 billion in the U.S. deficit for 2007. For both years, the increase in the U.S. deficit reflects an upward adjustment to the U.S. southbound estimates, which was partly offset by an upward adjustment 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), and from statistical adjustments to southbound services. For 2006, the largest increases in the U.S. northbound estimates result from statistical adjustment to “other” services and from an adjustment to bring U.S. transfers to a gross basis (a methodological adjustment). For 2007, the largest increases in the U.S. northbound estimates result from statistical adjustments to direct investment income and from definitional adjustments to “other” investment income.

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 some U.S. withholding tax estimates are included on a global basis in the U.S. published accounts and cannot be allocated by country for comparison with the Canadian estimates. This definitional adjustment causes the reconciled estimates to depart from the international statistical standards, but without this adjustment, the data 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. These 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 2007 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.

Acknowledgements

The reconciliations were carried out under the direction Edward Dozier, and Renee Sauers, international economists in Bureau of Economics Analysis’ Balance of Payments Division and Denis Caron, Chief, Current Account, in Statistics Canada's Balance of Payments Division.

At BEA, Mai-Chi Hoang was responsible for reconciling goods; Edward Dozier, Vivian Wong, and Anne Flatness, for services, with the assistance of Kristy Howell for financial services; Gregory Fouch and Peter Fox, for the accounts related to Canadian direct investment in the United States; Mark New, for the accounts related to U.S. direct investment in Canada; and Kristy Howell and Cavan Wilk for the portfolio income accounts.

At Statistics Canada, Angela Yuan was responsible for the production and coordination of reconciliation tables and for reconciling Canadian goods, Denis Caron was responsible for reconciling Canadian services, Christian Lajule for Canadian direct investment income, and Éric Boulay for Canadian portfolio investment income, with the collaboration and assistance of Komal Bobal, Heather Collier, Marllena Ifrim, Marie-Josée Lamontagne, François Lavoie, Barry Mersereau, Robert Théberge and Yiling Zhang.